The optimism about the unexpected Saudi gesture of unilaterally cutting an extra 1 mbpd of production in February and March prevailed yesterday. This voluntary cut coupled with an increase in Russian output implied that the fault lines between the two heavyweights remained. A virtual fly on the virtual wall of the virtual OPEC+ meeting, however, might have ended up with a different conclusion. Eavesdropping the talks might have revealed that there was no difference of opinion between the leaders of the two groups on how to proceed. They could have been in agreement that despite the setback in speedy demand growth it is only a question of a few months that the mass vaccine rollout takes shape and after that global consumption will pick up. Until then, however, Saudi Arabia, not to destroy the benefits of the hard work of the past 9-10 months, volunteered to provide an oil market stimulus, similar to those launched by central banks across the world to help economic recovery. It is anyone’s guess whether this gesture will be repaid when market conditions are more favourable, but the move was well received.
What this unexpected result means in practice is as follows (based on latest available supply-demand data that is likely to be revised when the next set of estimates are released next week): the predicted 1Q 2021 call of 27.18 mbpd on OPEC will be met with an OPEC production level of around 25.25 mbpd (assuming unchanged output from December from the three exempted member countries) resulting in a stock draw of almost 2 mbpd. It is also worthwhile noting that the producer group considers 2020 as an “outlier” therefore it reverts to the 2015-2019 period as a representative metric when calculating the 5-year average OECD stock levels. The outcome of the latest meeting and the resultant price reaction once again proved that as far as managing global oil balance is concerned less is financially more beneficial to the group than more.
The fact that Saudi Arabia is serious about supporting the market in coming months is reflected in the increase in its February OSP to Asia. Documents seen by Reuters revealed a rise of 70 cents/bbl of its Arab light crude. No wonder that the Brent structure is strengthening with the M1/M12 spread gaining almost $1.50/bbl in the last two weeks. The deepening Brent backwardation, in return, will encourage stock draws as selling crude out of inventories and replace them in a few months’ time is looking profitable at the moment.
The weekly statistics in US oil stocks did nothing to dent the confidence. It was a balanced report that was chiefly influenced by refinery utilization rates. Refiners operated at 80.7% of their nameplate capacity in the last week of the year, the highest since August. As a result, crude oil inventories registered a meaningful draw (also helped by year-end tax considerations) but stocks in the main product categories grew significantly.
The 8 million bbls decline in crude oil stocks was much steeper than expectations or the API figure. It concentrated on the US Gulf Coast (-6.2 million bbls) whilst Cushing inventories increased by nearly 800,000 bbls. Domestic output remained stable at 11 mbpd and net import was largely unchanged. WTI gained 70 cents/bbl to close at $50.63/bbl.
The jump in runs led to massive builds in both gasoline (+4.5 million bbls) and distillate (+6.4 million bbls) stocks. Of course, the pandemic also played part in these significant builds. Consumption of products dived 2.3 mbpd week-on-week, to 17.1 mbpd, the lowest for four months. The reason is meaningfully slower holiday travel. The builds are probably a one-off, consequently RBOB strengthened 229 points and Heating Oil gained 98 points.
Total commercial oil inventories climbed 1.6 million bbls and finished the year at 1.34 billion bbls. This is 4.8% higher than at the end of 2019 and 4.5% above the 5-year average. As the virus is doing its second or third round around US domestic demand growth might disappoint. However, the more than 100 million bbls depletion in commercial stocks from the peak in July and the narrowing surplus to the 5-year average that has shrunk from over 10% six months ago implies that recovery, albeit uneven, is under way.
Democracy or banana republic?
It is not the wall he promised to build. It is blue. There are a handful of achievements of the self-proclaimed GPOAT (Greatest President Of All Time) that will be remembered for years to come. Firstly, losing the mid-term elections in 2018 when Democrats won majority in the House of Representatives. Secondly, the handling of the pandemic. Thirdly, losing the 2020 elections as well as the popular votes. Fourthly, conceding the upper chamber of the US legislature to the Democratic party as the two remaining seats that were up for grabs have been lost by the Republican candidates yesterday in Georgia. Even galloping stock markets that President Trump claims is the result of his MAGA policies are ironically the product of what he has stood against – globalization as without the free flow of capital across borders the recent rally would have been much more muted.
So, what does the Democratic control of the Senate mean? As there are 50 Republican senators, 48 Democrats and two independents who are most likely vote along Democratic party lines it is the Vice President, Kamala Harris’s vote that will swing the pendulum towards the oldest political party of the US. The general perception is that a Democratic control of the Congress will provide further boost for economic growth. The incoming President, Joe Biden will have more leverage in launching his ambitious plans of additional stimulus in the fight against pandemic, of infrastructure spending and healthcare reforms although investors’ unease regarding tax hike and tighter regulations will undoubtedly grow. The gut reaction of the financial markets for the “Blue Sweep” was to sell the dollar, gold and bonds and buy equities. As reflation trade is on its way back the S&P 500 index finished 0.57% higher despite the disturbing events that took place in Washington DC after the oil market closed.
The President was never going to leave quietly but what he encouraged yesterday with his cynical, narcissistic, and primitive behaviour was hopefully his last act as President. Fanaticized hard core Trump supporters stormed the US Capitol as the Senate was about to certify the result of the November elections. Guns were drawn, shots were fired, and four lives have been lost. The siege temporarily forced investors’ and senators to run for shelter, but nerves were calmed later. These were shocking scenes, something that does not belong in the land of the free. It is the rule of the law that makes a country and its financial markets function. And it is the rule of law that was nowhere to be seen yesterday in the US capital. America deserves better and America will get better. The only worry is that although Trump will be gone in a few days’ time Trumpism will not be obliterated.