OPEC Cuts Global Oil Demand Again On New Round Of Lockdowns, But Doesn't Account For Possible Vaccines

In the latest closely watched OPEC Monthly Oil Market report published this morning, the oil-exporting cartel once again cut estimates for the amount of crude it will need to provide in 2021 as a return of covid lockdowns is expected to hit fuel use. The virus’s effects will "linger" next year even with the announcement of a vaccine breakthrough, the group said:

... Risks remain with regard to oil demand going forward. Ongoing developments in the COVID-19 pandemic will continue to dominate a recovery amid the latest news relating to a potential imminent vaccine. The structural impact of the pandemic on various sectors, especially the transportation sector, will linger well into 2021. Also, developments in labor markets, potential new policies governing the energy sector, as well as the effectiveness of the large scale monetary and fiscal stimulus measures will determine the strength of the rebound in economic activities in the year to come.

The revision illustrates why the group’s effective leader, Saudi Arabia, said that OPEC+ (including Russia) may adjust plans to restore supply when they meet later this month, especially if a Biden administration is seen as easing Iran's oil export embargo which could bring an additional 1 million barrels to market.

Specifically, according to OPEC:

  • Total global oil demand is now seen at slightly above 90.0mln BPD, a drop of 300kb/d from 90.3mln perviously

  • 2020 world oil demand is now expected to contract by around 9.8mln BPD y/y, up from -9.5mln previously.

  • 2021 World oil demand is now expected to grow by around 6.2mln BPD y/y, also a slower increase compared to the +6.5mln previously.

Some additional observations, courtesy of NewsSquawk:

  • Global oil demand forecast for 2020 is revised down by 0.3mln BPD

  • Downward revisions mainly take into account downward adjustments to the economic outlook in OECD economies due to COVID-19 containment measures, with the accompanying adverse impacts on transportation and industrial fuel demand through mid-2021

  • Given weaker-than-expected demand in OECD Americas in 3Q20 and the recently announced additional COVID-19 containment measures by various governments in OECD Europe.

  • Transportation and industrial fuel are expected to remain adversely affected throughout 4Q20.

Meanwhile on the supply side, total OPEC-13 crude oil production continued to rise, and averaged 24.39mln BPD in October 2020 (+0.32mln BPD m/m), according to secondary sources.

OPEC also reported that preliminary non-OPEC liquids output in October, including OPEC NGLs, is estimated to have increased by 0.25mln BPD m/m to average 66.79mln BPD (-4.35mln BPD y/y); preliminary data indicates that global oil supply rose in October by 0.58mln BPD m/m to average 91.17mln BPD (-9.25mln BPD y/y).

Some further observations:

  • Total OPEC-13 crude output increased mainly in Libya, Iraq and Nigeria, while production decreased primarily in the UAE, Angola, Venezuela and Congo.

  • Non-OPEC oil supply in 2020 is forecast to decline mainly in Russia, the US, Canada, Kazakhstan, Colombia, Malaysia, and Azerbaijan, and is projected to grow in Norway, Brazil, China, Guyana and Australia

  • Non-OPEC liquids production forecast for 2020 was revised down by 0.06mln BPD from the previous month’s assessment (now estimated to contract by 2.43mln BPD) owing to downward revision in the US due to production outages in the GoM following two hurricanes in October, as well as the lower-than-expected output in Norway, the UK, and Mexico.

While normally this report would have caused a drop in the price of crude, the reason why both Brent and WTI are up, and about to surpass August highs...

... is because the OPEC report was written before the latest Pfizer news and does not appear to have accounted for the vaccine developments and as such, traders will simply look through the report, instead focusing on the potentially favorable consequences of gradual economic reopening some time in 2021.