Oil has started the week trading on a positive overall market sentiment that is coming from a bullish combo of US inventories, Saudi production and expectations for solid OPEC+ compliance.
The market is bullish today, seeing inventories decline in the US last week and expecting that the trend will continue unchanged. Declining crude storage is always helping prices as it shows a healthy demand level when compared to the market’s supply.
The reduction of Saudi Arabian production is also helping global markets and prices. As less product is reaching the US coasts, inventories see a relief.
Saudi Arabia’s additional output cuts are beginning today, and it would be unusual to see a negative price reaction on a day when global supply is about to start shrinking.
Prices are rising today as Monday is the day when the Saudi ‘gift’ is delivered. It is a psychological trader reaction as most of the Saudi effect has been priced in since the kingdom announced its intention.
But the market trades on psychology and sentiment, and today is an indication of trader positivity and anticipation to see how the Saudi cuts actually affect flows. And vessel movements, refinery runs and storages will all be closely monitored from now on.
Meanwhile, the market is waiting for a long-discussed aid package that the Biden administration has promised. The new administration is aching to deliver on it promised relief funds and although the existing proposal has not yet secured republican support, President Biden is expected to push on.
The market expects that a financial aid will come soon for the US economy and it will be a huge disappointment if there are long-lasting hick-ups. For the moment, the aid is a relatively priced-in development that the market expects to see going forward.
Traders are also expecting news on compliance from the OPEC+ alliance. Technical committee meetings will help clarify the group’s performance, but the expectation is that members that failed to meet their obligations in the past, like Iraq, are finally compensating.
The positive spin will likely continue, as the group has proved itself a dependable supply cutter throughout the most volatile moments in the past year.
The first and foremost concern for OPEC+ is the price and market share balance. In our view, the current price strips have been just enough to fire up US shale, which is set to trend towards 11.5 million bpd in the next few months from the current 11.1 million bpd now.
This output level can be sustained even at a WTI price of $40-45 per barrel, but with WTI prices comfortably in the low 50s, we see an additional 300,000 bpd of upside risk to US supply by December 2021.
On the demand side, growth will be constrained by the ‘canceled’ Chinese Lunar New Year. Lockdowns and government restrictions will put a temporary pause on oil demand recovery in the region, and as a result, Rystad Energy has downgraded its global oil demand outlook by 0.4 million bpd to 91.6 million bpd for 1Q21, with a significant consumption drop expected to be clustered around the Chinese holiday in February.
We are also bracing for a slower vaccine roll-out and a possible effect on oil demand. Considering the global production and distribution obstacles, especially in Europe, we are modeling how 1-3 month delays to arrive at 50% of the population is vaccinated will affect oil demand.
If the global vaccination delay materialize, we estimate a negative demand impact of 8.4 million bpd, compared to 7.3 million bpd in our base case scenario for 1Q21.
