OPEC released its long-term energy outlook last week to much fanfare. The predominant message was that the world’s thirst for oil is unlikely to peak for two more decades. Yet while it dismissed concerns that peak oil had passed, it still cut its medium and long-term oil demand forecasts. The same fate was in store for its short-term projections which were updated yesterday with the release of its latest monthly oil market report.

Global oil demand in the final quarter of this year is expected to average 94.86 mbpd, 220,000 bpd less than last month’s estimate. This downgrade was to be expected given the downside pressures caused by rising COVID-19 infections across the world. What was more surprising is that the precarious near-term demand trend will spill over into next year. OPEC lowered its world oil demand forecast for 2021 by 80,000 bpd compared to last month’s report. This reflects a host of downside risks to short-term growth potential including the trajectory of the COVID-19 pandemic, the US presidential elections, Brexit, and ongoing geopolitical tension. That said, global oil consumption is still expected to reach 96.8 mbpd next year, a healthy 6.5 mbpd increase over the 2020 level.

On the supply front, OPEC upgraded its 2020 supply outlook for rival producers. Output from non-OPEC nations is expected to average 62.79 mbpd this year, 320,000 bpd more than a previous forecast. This is largely due to a more robust-than-expected rebound in US output. Conversely, OPEC trimmed its growth outlook for next year. Non-OPEC production is now projected to grow by 890,000 bpd in 2021 and average 63.68 mbpd, 110,000 bpd less than previously thought. Once again, the US is the major driving force behind this modest revision. Production decline rates across the major US shale plays are expected to act as a drag on output amid a tepid recovery in drilling activity.

As for OPEC’s production, the group’s compliance to pledged cuts improved in September as output dipped 50,000 bpd to 24.11 mbpd. Leading the drive lower was the UAE. The oil cartel’s third-biggest producer cut output by a hefty 240,000 bpd and in doing so returned to full conformity with voluntary supply curbs. In contrast, perennial laggard Iraq continued to produce excessively. Far from compensating for past overproduction, it increased output last month by 46,000 bpd. All the while, concerns are growing that some OPEC members exempted from quotas are raising production. And rightly so. All three OPEC members exempted from the supply cut deal raised output last month. Iran and Venezuela scored back-to-back monthly production gains in September and boosted supply by a combined 57,000 bpd. Libya, meanwhile, lifted output by 57,000 bpd following the lifting of a long-running oil blockade. Further production gains from the North African nation are anticipated as important oil fields resume production, the latest of which is the Sharara, the country’s biggest.

Nevertheless, OPEC’s oil output is still comfortably below what is required to ensure a balanced market. The producer group estimates the call on its crude will average 27.46 mbpd in 4Q20. The equivalent projection for next year is 27.93 mbpd, 220,000 bpd less than a previous forecast. Yet the current supply deficit may be living on borrowed time. As things stand, OPEC and its non-OPEC allies are due to loosen the leash on supply curbs by a further 2 mbpd in January. This wave of fresh supply coupled with returning Libyan barrels and lingering demand weakness has the potential to derail the fragile oil rebalancing. Simply put, oil market fundamentals for the early part of 2021 are nothing short of perilous. OPEC+ could provide a silver bullet by not tapering cuts at the start of next year as planned. But such a proposition will be hard to swallow by some of the group’s members even though failure to do so could trigger oil price Armageddon.

$28,000,000,000,000

OPEC’s weak demand forecasts was lost on the oil market yesterday. Instead, prices inched higher amid a host of supportive factors. For starters, oil bulls were emboldened by solid China trade data. The world’s biggest oil importer ramped up its intake of foreign crude in September to 11.8 mbpd from 11.2 mbpd in the previous month. Buying pressures were also given a helping hand after the IEA put a positive spin on the long-term future of the energy industry. The agency downplayed peak oil concerns and forecast that global oil demand will continue to expand for the next decade. Sentiment received a further boost as the IMF pared back its estimate of the COVID hit to the global economy. The Washington-based lender now predicts world GDP will shrink by 4.4% this year, better than the 5.2% decline forecast in the summer. That said, it expects a slower recovery next year. A second wave of COVID infections forced it to scale back its forecast for the rebound in 2021 from 5.4% to 5.2%.

Yet these new economic forecasts weren’t the standout figures from the latest IMF report. That prize goes to the eye-watering $28 trillion estimate of the final bill for the pandemic.

Upward pricing pressures have fizzled out this morning amid a lack of progress with respect to a US coronavirus relief package and underlying anxiety over the COVID pandemic. Supply jitters are also keeping upside potential under the cosh. OPEC+ plans to move ahead with plans to ease output cuts from January next year, according to the UAE’s energy minister. As mentioned previously, this could throw a spanner in the works for the oil rebalancing. All the while, a sense of normality is gradually returning to the US Gulf of Mexico after the passing of Hurricane Delta. The amount of oil production offline fell to 44% on Tuesday from 69% on Monday. Staying in the US, a Reuters poll pointing to a drop in crude and fuel stocks last week is failing to lift spirits. This suggests a wait-and-see approach is instead taking hold as market players brace for the next price catalyst.