Coronavirus cases are surging, and containment measures are being reintroduced. No surprise, then, that the IEA cut its near-term outlook for global oil demand in its latest monthly report. It slashed its estimate for the current quarter by a whopping 1.2 mbpd. Consequently, it now expects world oil consumption to decrease by 8.8 mbpd this year, worse than the 8.4 mbpd previously thought. Needless to say, this is not a good sign. However, peering behind these headline figures reveals that it’s not all doom and gloom.

The truth is that the demand side of the oil coin has become a tale of two stories. On the one hand, OECD stalwarts Europe and the US have been hit hard by the latest resurgence of COVID. The spike in infections has prompted renewed restrictions which, in turn, are wreaking havoc on their economies and mobility patterns. On the other, the fuel demand recovery across non-OECD nations is continuing apace, boosted by a post-COVID rebound in economic activity.

These diverging fortunes are highlighted by the IEA’s regional demand forecasts. OECD oil consumption in the final quarter of 2020 was reduced by 1.5 mbpd whereas it was upped by 300,000 bpd for non-OECD. This trend is expected to spill over into 2021. The oil demand estimate across rich-world economies in 1Q2021 was trimmed by 930,000 bpd. The equivalent forecast for their less-developed peers was increased by 200,000 bpd. The upshot is that non-OECD demand is projected to return to 2019 levels by the end of 1Q2021, when OECD demand is likely to remain some 7% below 2019 levels. Simply put, the OECD is acting as a major drag on the oil demand recovery.

While the oil demand outlook is a mixed bag, the supply front is currently skewed to the upside. Dominating proceedings is the return of Libyan production. The quicker-than-expected rebound pushed OPEC output to its fourth straight monthly gain in October.  And it will likely do so again this month after production in the once-embattled OPEC nation scrambled back above 1 mbpd. Elsewhere within the group, supply among the 10 members bound by a production agreement – barring you know who – held steady. Outside of the oil cartel, supply continues to inch higher and is forecast to rise by 1.1 mbpd in 1Q2021 from the current quarter.

This looming rise in supply coupled with stubborn demand weakness has made for a troubling fundamental backdrop in the new year. Such is the unease that fears are mounting that the current drawdown in global oil stocks is at risk of coming to an abrupt halt. Indeed, the IEA predicts that stocks will not decline in 1Q2021 if OPEC+ goes ahead with plans to increase output by 2 mbpd in January. What is more, the agency also took the opportunity to temper vaccine optimism. It poo-pooed the prospect of a near-term fillip to the oil demand recovery, arguing that the benefits from recent vaccine advances will only materialise in the middle of next year. This is due to the extended time frames involved in a successful vaccine rollout. Staying on the pitfalls of vaccines, another often sidelined hurdle is the growing anti-vaccine movement. Recent surveys have suggested that a growing portion of the general population are inclined to reject a coronavirus vaccine. Low vaccine take-up rates would undermine efforts to end the pandemic and therefore the threat of further oil demand destruction.

The updated oil forecasts from the IEA make it clear that the oil balance is facing a perilous start to 2021. The key takeaway is that OPEC+ must hold back from loosening the oil taps if they want to safeguard the oil rebalancing and market stability. Failure to do so would send oil prices into a downward spiral. In short, the looming OPEC meeting is a make-or-break event for the oil market.

Vaccine fatigue

The IEA’s cautious stance put a downer on sentiment. Oil prices struggled for momentum yesterday following blockbuster gains earlier this week and eventually ended in the red. It was a similar story on Wall Street where the COVID reality returned to the fore of investors’ concerns. Case numbers continued to trend higher in many of the world’s hotspots. The UK, Russia, Croatia, Greece and Japan all announced record daily cases. Meanwhile, the US registered its third consecutive day with a record number of new infections after topping the 150,000 mark.

For all of America’s intensifying COVID woes, the rise in cases does not appear to have hit fuel consumption. The delayed release of the latest EIA stock report revealed that US petroleum demand rose by almost 2 mbpd last week, topping 20 mbpd for the first time since March. As much as this points to robust levels of consumption, there are musings that this could have been a one-off election-induced bounce. Moreover, an unexpected rise in domestic crude stocks took the shine off the impressive demand figures. US crude stockpiles rose by 4.2 million bbls in the week to November 6. That said, total commercial oil inventories still fell by more than 11 million bbls over the period as the pick-up in fuel demand sent product inventories tumbling. Even so, this pullback failed to offset COVID jitters. Vaccine enthusiasm has fizzled out and the realisation is dawning that the oil market is in for a rough ride this winter.