Friday, March 29, 2024
 
 

Crude oil price rally may face supply side pressure in early 2021

- Advertisement -

Oil traders are optimistic the start of the deployment of vaccines means that an end to the worst economic ravages of the COVID-19 pandemic is in sight and that should boost demand for oil in 2021.

“The price of Brent is heading into the year end with solid support from traders,” said Chris Weafer, co-founder of Macro-Advisory in Moscow. “The price of Brent rallied 26.2% in the month of November and has added another 9% since the start to December (to 18th). That has reduced the price loss in 2020 to 20.8% and, so far, appears to have set a support price of $50 per barrel over the near-term,” he added.

But Weafer warned that supply side pressures may rise. Libyan oil production is up by over 1.0 million barrels per day since the cease-fire started and Venezuela is also reported to be adding more export volumes.

Members of the Organization of Petroleum Exporting Countries (OPEC) and its major oil-producing allies led by Russia, a group known as OPEC+, have switched to a monthly meeting to more closely monitor the market trends and may have to consider suspending production recovery plans if demand does not rally sufficiently to adsorb the extra oil supply.

Iran may be the biggest problem, Weafer said. Potentially the biggest problem for OPEC+ is if the new US Administration of president-elect Joe Biden decides to rejoin the Joint Comprehensive Plan of Action (JCPOA), the so-called Iran deal, and reduce the current sanctions blocking Iranian oil exports. “That could, potentially, add up to 2.0 million barrels of Iranian oil to the global market. But while President-elect Biden has said he is in favour of returning to the JCPOA deal, Congress is vehemently opposed to such a move. So, it is a possible threat but one that traders currently assign a low probability in 2021,” he said.

According to Weafer, the reasons for the recent rally include, the roll-out of the COVID-19 vaccines, reports that China continues to be a buyer of oil into its strategic reserves and more than daily usage, and the weak dollar, which is also providing price support for oil.

The US dollar lost 2.4% versus the euro in November and another 2% since the start of December. “That brings the year-to-date (December 16th) loss to almost 8%. That scale of exchange rate loss for the dollar has historically always provided good support for oil,” the Macro-Advisory expert said.

What to watch in 1H21

The key drivers of the oil price in early 2021 are expected to include COVID-19, oil demand, US shale, Libya, India and China.

Probably the most important factor in 2021, especially in the first half of next year, will be the trend in coronavirus infections in major economies and the economic result from actions taken to control the pandemic. “While the roll-out of various vaccines in many countries is hugely encouraging, it is far too early to be sure that this process will succeed in bringing the infection rate under control, or how long it will take,” Weafer said, adding that news of successes or setbacks is bound to create volatility in the oil price in the first half of 2021.

Regarding demand, OPEC has turned more bearish on global oil demand due to the second wave of COVID-19 infections. In the most recent oil market outlook, OPEC revised down its projections of global demand by 280,000 barrels per day for 2020 and by 580,000 barrels per day for 2021. “These 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,” OPEC said in the report.

OPEC+ members have adjusted their production agreement so that, from January 1st, they will in aggregate now only add 500,000 barrels per day to its oil production quotas. The original plan was for OPEC+ to add 2 million barrels. It means that the total cut will be scaled back from the current 7.7 million barrels per day to 7.2 million barrels per day.

“The price of oil will be sensitive to further actions taken by the group. OPEC+ ministers have agreed to consult monthly in 2021 and to decide on appropriate actions based on how they see the market trend,” Weafer said.

“For Russia, the decision to adjust the January 1st production quote means that the country may now only add back 125,000 barrels per day instead of the previously planned 500,000 barrels per day,” he added.

US shale

The trend in US oil production will affect not only the supply side of the price equation but also, very likely, what OPEC+ decides. “If US production stays flat or grows minimally, then OPEC+ members are more likely to continue taking actions that support the oil price. But, if they see that US production is recovering strongly with the higher oil price, and thus gaining market share, then the appetite to continue holding back production will be less and we may then see the price dip,” Weafer said.

Meanwhile, the ceasefire in the Libyan civil war has allowed for a fast recovery in the country’s oil output. That also gives OPEC+ a headache as Libya is not part of the production agreement.

Moreover, the steady recovery in oil production and exports from Venezuela may also cause problems for OPEC+ and affect the decisions Ministers make. Venezuela’s oil exports nearly doubled in November as new buyers linked to a Russian trading firm stepped up purchases.

Also, Iran has instructed its oil ministry to prepare installations for production and sale of crude oil at full capacity within three months, state media said after the US election and ahead of a possible easing of US sanctions after Biden takes office.

Indian buyers have already said that they are preparing to resume buying oil from Iran, Weafer said this appears to be based on the assumption that the incoming US Administration will rejoin the JCPOA agreement and therefore, ease the oil sanctions against Iranian oil.

Turning to China, Weafer said private tank farm operators, refiners and traders pumped an extra 310-600 million barrels of oil into storage in China this year, according to an industry survey. That is more than one month’s normal demand for the country. Weafer noted that that buying undoubtedly support the oil price since early summer when, it is reported, the buying for storage started.

follow on twitter @energyinsider

- Advertisement -

Subscribe to our newsletter

Co-founder / Director of Energy & Climate Policy and Security at NE Global Media

Latest

U.S. condemns latest PRC actions in South China Sea as dangerous

Coming just days after U.S. Secretary of State Antony...

With Sweden now a NATO member, what’s next?

Sweden completed the necessary diplomatic formalities on March 7,...

Inaugural B5+1 Forum launched to boost regional trade and investment

On March 13-15, government policymakers, business leaders, experts, and...

Don't miss

U.S. condemns latest PRC actions in South China Sea as dangerous

Coming just days after U.S. Secretary of State Antony...

With Sweden now a NATO member, what’s next?

Sweden completed the necessary diplomatic formalities on March 7,...

Inaugural B5+1 Forum launched to boost regional trade and investment

On March 13-15, government policymakers, business leaders, experts, and...

U.S. zeroes in on Houthi revenue sources

The U.S. Government made several announcements this month regarding...

U.S. condemns latest PRC actions in South China Sea as dangerous

Coming just days after U.S. Secretary of State Antony Blinken visited Manila (March 19), Washington released on March 23 a strongly worded statement of...

Inaugural B5+1 Forum launched to boost regional trade and investment

On March 13-15, government policymakers, business leaders, experts, and investors from C5+1 countries inaugurated the first-ever Business 5+1 (B5+1) Forum which was held in...

U.S. zeroes in on Houthi revenue sources

The U.S. Government made several announcements this month regarding new sanctions on Houthi revenue sources, building on steps taken in coordination with the U.K....

Can Innovation Diplomacy End the Climate Gamble?

With today’s global challenges urging equally global responses, an overlooked subset of diplomacy emerges as potentially pivotal: innovation diplomacy, a discipline related to the...

U.S. joins International Coalition for the Return of Ukrainian Children

On March 7, the office of the spokesperson at the U.S. Department of State issued a media note, clearly meant to be circulated in...

Eyeing competitors, OPEC+ countries will keep cutting oil production

Several OPEC+ countries are extending additional voluntary cuts of 2.2 million barrels per day, aimed at supporting what they are labeling "the stability and...

Intellexa Commercial Spyware Consortium sanctioned

The U.S. Government announced on March 5 a new set of sanctions on the members of the Intellexa Commercial Spyware Consortium based across Europe....

Zimbabwe: U.S. reconfigures sanctions to focus on corruption and human rights

On March 4, three separate U.S. Government Departments/Agencies issued Zimbabwe-specific sanctions guidance, demonstrating how complex and intertwined U.S. sanctions legislation has become and how...