When stock market fatigue sets in, the dollar usually strengthens, and oil becomes subdued. This mantra was upended yesterday due to fears of disruptions in physical oil supply. After a tepid start for the day the oil market sprang to life just before London lunchtime due to protests at the Libyan ports of Es Sider and Ras Lanuf. According to sources, who spoke to Reuters production was unaffected, but three oil tankers were anchored off at Es Sider and one at Ras Lanuf waiting to load. Potential delays in Libyan crude oil exports coupled with the rebounding thirst of Chinese refiners for foreign oil not only helped the recovery in outright prices continue but greatly supported the Brent structure, too. The October contract extended its premium over November by 15 cents/bbl to 78 cents/bbl.
The impact of Hurricane Ida was not fully reflected in last week’s EIA stock report, but amends are likely to be made today. The Bureau of Safety and Environmental Enforcement estimates that as of yesterday still about 1.4 mbpd of oil production and 1.72 bcf/d of natural gas output was shut as 79 production platforms are still unoccupied. Refiners in the US Gulf Coast seem to be making a slightly quicker comeback. The full impact of the devastating storm will probably be on full display this afternoon, after the EIA released its Weekly Petroleum Status Report on oil inventories, production, and refinery activity. If last night’s API data is anything to go by then the picture is less rosy than expected, at least on the product front. Crude oil inventories drew 2.9 million bbls, distillate stocks fell 3.7 million bbls and gasoline inventories declined 6.4 million bbls. Even those who are ambiguous about stock depletion beyond this year would admit that the latest set of data, if confirmed by the EIA, ought to provide short-term price support.
Demand estimates are cut
It will not come as a surprise that the EIA is now less optimistic on oil consumption globally than it was last month or before. The latest wave of the coronavirus, the spread caused by the Delta variant, made investors cautious and pragmatic last month as Brent retreated $14/bbl from the multi-year high reached at the beginning of July. This pessimism has been reflected in the latest Short-Term Energy Outlook released by the EIA yesterday afternoon.
The administration itself acknowledges what has been laid bare for quite a few months now: forecasting is never an exact science due to the myriads of variables but at the time of a health crisis it is especially a daunting task. Uncertainty is the ongoing theme and a small change in current assumptions will lead to a significant change in conclusion in the future. The current baseline implies an average Brent price of $71/bbl for the fourth quarter of the year because of steady depletion of global stocks, according to the EIA. It will then gradually soften in 2022 and average at $66/bbl due to increases in production from OPEC+ and in US tight oil. The result is a surplus of supply. Next year’s prediction is in line with our view: unless OPEC and its 10 allies rein in the gradual tapering of output increase the solid and impressive drawdown in global and OECD oil inventories, we observed in 2021 will reverse.
The most pertinent set of data is the downward revision in 3Q 2021 global oil demand data, which reverberates through 2022. Because of the lockdowns and re-introduction of mobility restrictions all over the world in July and August due to the Delta mutation of the coronavirus global oil demand has been amended by 510,000 bpd to the downside in the third quarter of the year. This cut then has left its mark on the 2021 oil demand, which has seen a downward correction of 240,000 bpd. For the whole of 2022 oil consumption is now seen 101 mbpd, and adjustment of -240,000 bpd from August, the same as in this year. In other words, next year’s oil demand growth remained unchanged at 3.63 mbpd.
Intriguingly but understandably the oil balance has not worsened dramatically for the rest of the year despite the massive cut in oil demand growth. It was uncalled for, nonetheless Mother Nature came to help. As a consequence of the Mexican production shut down and the damage Hurricane Ida caused in the Gulf of Mexico non-OPEC production has been revised down by 580,000 bpd for the incumbent quarter. These acts of God have greatly contributed to the continuous decline in OECD inventories that could fall as low as 2.8 billion bbls at the end of the year if the EIA is to be believed.
The above figure is refreshingly bullish and those who believe that Brent will reach the magical $80/bbl milestone before 2021 draws to a close base their confidence on this or at least on similar assumptions. Whether they will prove correct will depend on two factors. The first one is how forward-looking the majority of the market is. Oil prices are very often the subject of perceptions and if the herd believes that global oil supply will exceed global consumption next year (the IEA reckons global oil stocks will build at the rate of 440,000 bpd in 2022) the upside potential based on 3Q-4Q 2021 oil balances could be limited. The second factor is the action and probably more importantly the communication of the OPEC+ alliance. Any sign of willingness to put the current strategy of increasing output by 400,000 bpd a month on temporary hold next year will send out a strong signal that the producer group is determined not to jeopardize the achievement of this year and last by producing above the level demanded by the market. There is a lot to ponder and lingering uncertainties, the known unknowns, are here to stay with us.