Oil Market Report - December 2020

• We forecast that oil demand will fall by 8.8 mb/d y-o-y in 2020, a modest 50 kb/d downward revision from our previous Report. Our 2021 demand forecast was revised down by 170 kb/d. This is mainly because of another downgrade for jet fuel/kerosene demand, which will account for around 80% of the overall 3.1 mb/d shortfall in consumption in 2021 versus 2019. In 2021, demand for both gasoline and diesel is projected to return to 97-99% of their 2019 levels.
• Global oil supply rose 1.5 mb/d in November to 92.7 mb/d as the US recovered from hurricane shut-ins and Libya built up production. In December, production may rise again ahead of OPEC+ increasing its quota by 0.5 mb/d in January. OPEC+ dominates global growth in the near term, with virtually all the 4Q20 gains and 80% in 1Q21. For 2021 as a whole, non-OPEC producers outside OPEC+ are expected to increase output by 400 kb/d after a fall of 1.3 mb/d in 2020.
• Global refinery throughputs fell almost 1 mb/d in October mainly due to maintenance and hurricane shutdowns. The seasonal slowdown of refined product demand in the northern hemisphere winter combined with tighter crude oil markets will result in a challenging environment for refiners in the short-term. Estimated product stock draws reached their 2020 peak in October and are expected to slow until the next leg of the demand recovery in 2Q21.
• OECD industry stocks fell in October by 55.3 mb (1.78 mb/d) to 3 129 mb, and were 183.4 mb above the five-year average. Observed global stocks fell by 4.1 mb/d. Our analysis suggests that the global crude market will have a stock surplus of 625 mb at the start of 2021 versus December 2019. If we assume that Chinese balances are neutral in 2021, the market will absorb the 183 mb located elsewhere and in July it will move into deficit versus end-2019.
• Oil prices have moved rapidly and smoothly from contango to backwardation, based on stronger Asian demand and effective OPEC+ supply management. ICE Brent futures rose $2.46/bbl in November to $43.98/bbl and closed at $49.97/bbl on 11 December. Physical crude price discounts to futures improved in late November and early December. In November, freight costs benefited from a rise of tanker activity for the first time in since May, due to stronger Asian buying. 

• We forecast that oil demand will fall by 8.8 mb/d y-o-y in 2020, a modest 50 kb/d downward revision from our previous Report. Our 2021 demand forecast was revised down by 170 kb/d. This is mainly because of another downgrade for jet fuel/kerosene demand, which will account for around 80% of the overall 3.1 mb/d shortfall in consumption in 2021 versus 2019. In 2021, demand for both gasoline and diesel is projected to return to 97-99% of their 2019 levels.
• Global oil supply rose 1.5 mb/d in November to 92.7 mb/d as the US recovered from hurricane shut-ins and Libya built up production. In December, production may rise again ahead of OPEC+ increasing its quota by 0.5 mb/d in January. OPEC+ dominates global growth in the near term, with virtually all the 4Q20 gains and 80% in 1Q21. For 2021 as a whole, non-OPEC producers outside OPEC+ are expected to increase output by 400 kb/d after a fall of 1.3 mb/d in 2020.
• Global refinery throughputs fell almost 1 mb/d in October mainly due to maintenance and hurricane shutdowns. The seasonal slowdown of refined product demand in the northern hemisphere winter combined with tighter crude oil markets will result in a challenging environment for refiners in the short-term. Estimated product stock draws reached their 2020 peak in October and are expected to slow until the next leg of the demand recovery in 2Q21.
• OECD industry stocks fell in October by 55.3 mb (1.78 mb/d) to 3 129 mb, and were 183.4 mb above the five-year average. Observed global stocks fell by 4.1 mb/d. Our analysis suggests that the global crude market will have a stock surplus of 625 mb at the start of 2021 versus December 2019. If we assume that Chinese balances are neutral in 2021, the market will absorb the 183 mb located elsewhere and in July it will move into deficit versus end-2019.
• Oil prices have moved rapidly and smoothly from contango to backwardation, based on stronger Asian demand and effective OPEC+ supply management. ICE Brent futures rose $2.46/bbl in November to $43.98/bbl and closed at $49.97/bbl on 11 December. Physical crude price discounts to futures improved in late November and early December. In November, freight costs benefited from a rise of tanker activity for the first time in since May, due to stronger Asian buying. 

We are close to the end of 2020 and Brent futures prices have recently moved above $50/bbl for the first time since early March. Indeed, futures markets have moved into a shallow backwardation looking twelve months ahead. On the other hand, physical barrels have only recently traded close to futures prices, underlining the continued uncertainty that Covid-19 is causing oil demand and market stability.

The understandable euphoria around the start of vaccination programmes partly explains higher prices but it will be several months before we reach a critical mass of vaccinated, economically active people and thus see an impact on oil demand. In the meantime, the end of year holiday season will soon be upon us with the risk of another surge in Covid-19 cases and the possibility of yet more confinement measures. From the supply side, sentiment has also been boosted by news that the OPEC+ countries will increase their production quotas in January by significantly less than planned.

In the short term, oil demand remains weak and we have reduced our estimate for the fourth quarter of 2020 by 0.2 million barrels per day on small data revisions in various countries. For the year as a whole, global demand will be 91.2 mb/d, which is 8.8 mb/d below the 2019 level and down 0.1 mb/d from our last Report. Demand has recovered from its trough in the second quarter when it was 16.3 mb/d (16.4%) below the year-earlier level, but in 4Q20 it remains 6.2 mb/d down year-onyear, reflecting the impact of the second wave of lockdowns.

The recovery in the second half of 2020 is almost entirely due to China’s fast rebound from lockdown. Demand there will grow by 0.7 mb/d in the period. The picture in OECD countries is bleak: in the same period demand will be 5.3 mb/d lower than a year ago. Indeed, Europe appears to be going backwards with demand in 4Q20 lower than in 3Q20 as re-imposed lockdowns take their toll. Globally, weakness in the aviation sector largely explains a downgrade to demand in this Report of 0.3 mb/d for the first half of 2021. This contributes to a smaller rebound in demand in 2021 of 5.7 mb/d.

On the supply side, the OPEC+ countries have shown flexibility in amending their quota arrangements. Demand is clearly going to be lower for longer than expected when the supply agreement was concluded in April and there is rising production from Libya to accommodate. The agreement to increase the quota by a modest 0.5 mb/d each month, subject to conditions providing the headroom for more supply, is based on a recognition that the market remains fragile and is in need of careful adjustment.

In 2020, we have seen unprecedented and historic turbulence in energy markets. The disruption to normal life caused by the pandemic has had a serious impact on the health and welfare of millions of people. We hope that the New Year will bring better times to you and your families.

We are close to the end of 2020 and Brent futures prices have recently moved above $50/bbl for the first time since early March. Indeed, futures markets have moved into a shallow backwardation looking twelve months ahead. On the other hand, physical barrels have only recently traded close to futures prices, underlining the continued uncertainty that Covid-19 is causing oil demand and market stability.

The understandable euphoria around the start of vaccination programmes partly explains higher prices but it will be several months before we reach a critical mass of vaccinated, economically active people and thus see an impact on oil demand. In the meantime, the end of year holiday season will soon be upon us with the risk of another surge in Covid-19 cases and the possibility of yet more confinement measures. From the supply side, sentiment has also been boosted by news that the OPEC+ countries will increase their production quotas in January by significantly less than planned.

In the short term, oil demand remains weak and we have reduced our estimate for the fourth quarter of 2020 by 0.2 million barrels per day on small data revisions in various countries. For the year as a whole, global demand will be 91.2 mb/d, which is 8.8 mb/d below the 2019 level and down 0.1 mb/d from our last Report. Demand has recovered from its trough in the second quarter when it was 16.3 mb/d (16.4%) below the year-earlier level, but in 4Q20 it remains 6.2 mb/d down year-onyear, reflecting the impact of the second wave of lockdowns.

The recovery in the second half of 2020 is almost entirely due to China’s fast rebound from lockdown. Demand there will grow by 0.7 mb/d in the period. The picture in OECD countries is bleak: in the same period demand will be 5.3 mb/d lower than a year ago. Indeed, Europe appears to be going backwards with demand in 4Q20 lower than in 3Q20 as re-imposed lockdowns take their toll. Globally, weakness in the aviation sector largely explains a downgrade to demand in this Report of 0.3 mb/d for the first half of 2021. This contributes to a smaller rebound in demand in 2021 of 5.7 mb/d.

On the supply side, the OPEC+ countries have shown flexibility in amending their quota arrangements. Demand is clearly going to be lower for longer than expected when the supply agreement was concluded in April and there is rising production from Libya to accommodate. The agreement to increase the quota by a modest 0.5 mb/d each month, subject to conditions providing the headroom for more supply, is based on a recognition that the market remains fragile and is in need of careful adjustment.

In 2020, we have seen unprecedented and historic turbulence in energy markets. The disruption to normal life caused by the pandemic has had a serious impact on the health and welfare of millions of people. We hope that the New Year will bring better times to you and your families.