A number of bullish pieces of news are helping oil prices rise today, helping oil prices and especially WTI recover lost gains, reaching levels that are pleasing even the most ambitious of traders.
Having companies like Saudi Aramco, BP and Goldman Sachs publicly saying that demand will bounce to pre-pandemic levels already in 2021 has fed the market with confidence that the demand recovery is not that far away, so some pessimism was brushed off today.
While we definitely see oil demand recovering as governments ramp up vaccination efforts, we find that a recovery to 100 million bpd by August 2021 is hardly possible.
A rebound of total global oil demand to pre-virus levels implies a full recovery of the aviation sector, and jet fuel demand is still at just 40% below 2019 levels. That is a long-haul trip to full recovery right there!
A surge in the aviation sector is dependent on the restart of international flights, and we find that even in the case that we manage to vaccinate over 50% of the OECD population by August, the return to “normal” international flight activity is unlikely as the uneven vaccination of Non-OECD countries is a major headwind.
Also, some lockdowns are still very likely as new variants circulate possibly decreasing the effectiveness of vaccine’s response.
The market is also being a tad extra bullish as February is the month that Saudi Arabia begins its deeper production cuts and traders are waiting to see the initial effects on global flows.
Some hints on how balances will be affected may come from today’s OPEC+ JTC meeting, an event the market is always aching to follow, hoping for some positive remarks, especially on members’ production quota compliance, which is expected high.
Whether prices stay at current levels or are set for a correction is largely dependent on the OPEC+ maintaining its supply management policy and its extent. All eyes will be set in news from the OPEC+ discussions.
Weather in the US are also providing a helping hand to prices, as an unusual winter storm in the US northeast helps fuel demand for heating. Weather effects are never that long-lasting though and fuel demand there is expected to normalize soon.
There is an oil price wild card in the US as well, and it’s the timing and size of the anticipated US stimulus and aid package that the Biden administration is working on. The market will definitely trade further on this when an agreement emerges and the price direction will depend on the details.
Even if oil prices are reaching their healthiest levels in a long time, caution is advised as immediate demand setbacks should not be neglected.
In addition to downwards revisions that we have recently made to our demand estimates due to the ‘cancelled’ Chinese Lunar New Year, and slower vaccines roll-out, the supply side is getting increasingly risky for prices.
There is a downside price risk as Iran boost its oil production and exports in anticipation of a deal with the Biden administration and as US shale gets fired up with WTI prices comfortably in the low 50s.
