There are two plausible explanations behind the resilience of financial markets. The first one is the strong belief that stimulus measures are sufficient to provide support until the pandemic is contained. The second one is that governments will not re-impose nationwide lockdowns and consequently economies will not come to a complete standstill like in April and May. This confidence prevails despite curfews are being imposed in several French towns, schools are being closed in the Czech Republic and partial lockdowns shut bars and restaurants in the Netherlands. The situation is dire, especially in Europe where new cases are running at around 100,000 a day, twice as much as in the US and about one-third of the total. Yet, the MSCI Global Equity Index is only 1.4% shy of the all-time high reached last month. US stock indices fell over the last two days as a potential agreement on fiscal stimulus is now not expected until after the presidential elections, but the S&P 500 index is less than 3% below its record high.

Oil has also been immune lately from the perceived negative demand impact of Covid. Tuesday’s rally was followed through yesterday and the two major crude oil contracts finished the day nearly $1/bbl higher. The December/January Brent spread strengthened 7 cents and at -38 cents/bbl the front-end spread is the strongest for more than two months. In addition to the underlying optimism oil has also been supported by expectations that the impact of Hurricane Delta will be felt unambiguously in this week’s US stock report. The API confirmed this view last night. It showed drawdowns all around. Crude oil inventories fell by a forecast beating 5.4 million bbl. Distillates stocks were also down more than expected (-3.9 million bbls) and the 1.5 million bbls reduction in gasoline stockpiles matched analysts’ estimates.

Precarious future

This month the IEA stands out. Both the EIA and OPEC have made sizeable reductions on 4Q oil demand and also revised their 2021 forecasts lower. Consequently, the call on OPEC has also fallen. For the current quarter, the EIA cut it by 110,000 bpd and OPEC by 890,000 bpd. For the whole of 2021 the amendments were -240,000 bpd (EIA) and -160,000 bpd (OPEC). The IEA, on the other hand, stood firm and left the 4Q20 OPEC call unchanged at 28.80 mbpd and the 2021 estimates only 20,000 bpd below the September projection at 28.35 mbpd.

This relative optimism, however, is more the result of lingering uncertainty, rather than genuine conviction that oil demand recovery will be solid and even. In fact, the IEA forecasts the slowest growth in global oil demand for next year: it is at 5.48 mbpd, compared with 6.26 mbpd from the EIA and 6.54 mbpd from OPEC.

In the feature article the IEA draws attention to the upward trajectory of Covid-19 infections. This leads to concerns about economic growth, which could act as a break on a healthy rebound in global oil demand. It is this uncertainty that makes forecasting for the coming year a tricky business. The agency points out that the dubious future is reflected in the curve of Brent, which does not reach $50/bbl until after 2023.

Next year oil balance is, indeed, uncertain. Based on available numbers, however, oil inventories are expected to deplete rapidly. Global stocks drew 900,000 bpd in the third quarter (partly helped unplanned production outages and maintenance in Brazil, Canada and the North Sea). Demand for OPEC oil will increase by 2.4 mbpd to 28.80 mbps in the current quarter. The OPEC+ producer group has achieved a high compliance lately and this is expected to continue in months ahead. Even with extra Libyan barrels -the IEA assumes output from the North African OPEC member will reach 700,000 bpd by the end of the year- the global stock draw in the next three months should be around 4 mbpd or 368 million bbls in total.

Next year will see an increase of 2 mbpd in the output of the OPEC+ group. Both the Russian and the UAE energy ministers emphasized recently that the alliance will stick to the original agreement, do not plan to accommodate additional Libyan barrels and will ease output curbs from January 1. In case of falling prices in the next 2-3 months the issue will likely be re-visited but this latest development has probably disappointed oil bulls. The good news is that this increase in production (the OPEC-10 share will be 1.2 mbpd implying a production level of around 26 mbpd for the entire group in 2021) will still be lower than the estimated demand growth. This is one of the reasons why OPEC does not ring the alarm bell as Libyan output and exports are edging higher.

When demand grows faster than supply stock draw accelerates. This is expected to be the case in 2021 although it has to be stressed that the speed of this acceleration is slowing due to the downward revisions in oil demand. Still, based on the latest IEA projections and using the aforementioned 26 mbpd output level from OPEC for next year global oil inventories are set to fall at a rate of 2.35 mbpd. This figure suggests an OECD stock depletion of 340 million bbls that would take oil inventories in the developed part of the world below the end-2019 level. Uncertainties understandably create lots of “ifs” and “buts” and brave assumptions have to be made. The latest available data from the IEA, however, implies that the $50/bbl level basis Brent will be achieved much earlier than what the current curve indicates unless global oil demand for next year proves to be vastly overestimated.