Donald Trump has proved it once again that he has an enormous albeit undue influence on financial markets. Probably he has not fully recovered from the coronavirus that attacked him last week but he was quick to call off talks on further fiscal stimulus with less than four weeks to go until Election Day. Those who are suffering from the financial impact of the pandemic in the United States have been let down once again, or so they thought. Stock markets dived on Tuesday but recovered impressively yesterday as the president produced one his legendary U-turns and now proposes so-called “stand alone bill” that would include $1,200 pay-out to “our great people IMMEDIATELY” and further help to the selected few, including airlines. If only the US President had a regulator.

Oil, on the other hand, had more important and immediate fundamental issues to deal with. These came in the form of Norwegian oil workers’ strike that could be extended and the next tropical storm that is expected to make landfall in the Gulf of Mexico as a category 3 storm over the weekend. Around 1.5 mbpd of production has been shut in, so far.The rally from the beginning of the week, however, ran out of steam yesterday. This weakness bears all the hallmarks of some profit-taking after two days of marching higher and might prove temporary because

  1. equity markets reversed course and started to climb higher again,
  2. safe haven dollar weakened and
  3. a seemingly tepid weekly EIA report on US oil inventories was actually more on the bullish side.

To begin with, commercial oil inventories drew 2 million bbls. It is not a lot but considering that they are 42 million bbls or 3% lower than in July they imply that the anticipated depletion in the US and in the OECD is truly under way. The 500,000 bbls build in crude oil stocks seems a non-event, however, inventories grew 2.5 million bbls west of the Rockies leaving PADD 1-3 with a net draw of nearly 2 million bbls. Although domestic output climbed to 11 mbpd, it is likely to decline next week due to Delta.

The fall of 1.4 million bbls in gasoline and 1 million bbls in distillate inventories is also constructive if anything but it was the demand figures that really caught the eye. Weekly consumption rose by 900,000 bpd to 18.4 mbpd. Gasoline demand increased by 370,000 bpd whilst thirst for distillates was up by 200,000 bpd on the week. No doubt more downs will follow any ups but based on the latest statistics the oil market deserved better yesterday. As a matter of fact, it made amends towards the end of the day as it rallied off the day’s lows. Post-settlement help came from the Norway where Equinor warned that the nearly 500,000 bpd Johan Sverdrup could come offline unless strike is averted by next Wednesday and it is helping prices recover further this morning.

Sluggish oil demand growth slows stock drawdowns

Regardless how hard the oil market tries to rally the pandemic is unambiguously taking its toll on global oil demand. It does not matter how bearish one is, under the current circumstances global and OECD oil inventories will keep depleting through the end of 2021. If these two statements sound conflicting and contradicting enough that is because they are. They are based on the latest Short-Term Energy Outlook. The report perfectly reflects the uncertainty lingering over the supply-demand outlook. The most reasonable conclusion to draw from the latest estimates is that the medium-term future is brighter than the immediate one, albeit the speed of next year’s stock draw is slowing.

Confirmed coronavirus cases are close to 36 million with the death toll well over 1 million. As localized lockdowns are being re-introduced regional economies suffer leading to aggregate demand destruction. It appears that monetary arsenals have largely been exhausted as interest rates are close to zero or even in negative territory in some cases. Fiscal weapons have not been re-deployed yet. Consequently, global oil demand had to be revised down. For the last quarter of this year at 97.05 mbpd it is now 450,000 bpd less than predicted last month. Next year’s demand growth has been cut from 6.53 mbpd last month to 6.26 mbpd with the absolute figure falling to 99.08 mbpd, 510,000 bpd lower than predicted in September.

As the revisions in demand outweighed the adjustments in non-OPEC supply the calls on OPEC oil have also declined. For the balance of this year the world will apparently need 28.64 mbpd of oil from the organization, 110,000 bd less than last month. For the whole of next year this reduction is 240,000 bpd, which gives us an absolute figure of 29.01 mbpd.

This is a disappointing monthly estimate but there are silver linings. The first one is that global and OECD stocks are set decline next year. They are expected to fall from 3.09 billion bbls at the end of 3Q 2020 to 2.92 billion bbls by January 2022. This is still above the 2019 level (2.88 billion bbls) but the estimate could actually turn out to be conservative. That is because the EIA is the only agency that provides forecasts for OPEC production and for the whole of 2021 it puts it at 28.75 mbpd. This figure seems overly optimistic as the current OPEC+ agreement suggests a combined OPEC-10 production ceiling of 23.16 mbpd from the beginning of 2021. The three exempted member countries will not be able to ramp up their output by 5.5 mbpd. The actual stock depletion could turn out to be steeper provided that all the other estimates will prove accurate and OPEC shows discipline.

As for the US domestic crude oil production was left unchanged at 11.08 mbpd for 2021. As mentioned above, next year’s global oil demand growth is seen at 6.26 mbpd. The US will contribute 1.74 mbpd to this growth (OECD will be responsible for roughly half of it) with gasoline consumption struggling to get back over 9 mbpd and distillate above 4 mbpd. The recovery from Covid has started but it is a painful process, which is liable to constant amendments and alterations.