Oil flat as market now waits for positive demand outlook to materialise
The positive oil demand outlook that pushed prices to gains last week has now exhausted its potential and prices stabilized, as the market is now waiting for the forecasts to be translated into a real market demand uptick.
There is a risk over the recovery of oil demand as key oil-consuming countries around the world, such as India, still suffer from increasing Covid-19 infections and as Europe’s lockdowns are ongoing.
Nevertheless, oil demand is expected to start rising again over the coming months. The boost will be more felt in the second part of 2021, when vaccination campaigns will result into a reopening of many economies globally.
For the moment prices are flat, as the market digs into the day-to-day fundamentals of just how realistic the promised demand recovery is, especially as Europe and India are still struggling.
Notably, France recorded an increase in the number of coronavirus patients in intensive care units – a troubling bellwether that the health risk hasn’t abated even amidst a nationwide lockdown.
India is in a losing battle with the COVID-19 infection curve and is on the brink, if not already deep inside, a national health crisis, which has started affecting oil demand, with a further downside potential. If much more of Indian oil demand is slashed, prices will take notice.
However, prices are not losing today despite the headaches of Europe and India, as swift recovery is forecast in both the US and China, where refineries will be increasing crude runs to satisfy the brisk uptick in end-consumer demand.
Globally, we see total liquids demand averaging 95.4mn b/d in 2021, which would imply a 5.7mn b/d yr/yr increase since 2020.
The long-term Brent futures curve is still in a healthy backwardation, a signal that market participants expect crude dynamics to be tight, which our data confirms.
We forecast overall global implied stocks to draw by 1.1mn b/d over in the second quarter of the year, and then even deeper by 2.8mn b/d in the third quarter, supported by the vaccination rollout and reopening of economies in the summer months.
The tighter outlook for the next 6 months is bullish enough for now to overcome the pockets of negative coronavirus developments.
While we do not expect a big disruption to the positive trend, a major slowdown in vaccination campaigns and possible delays in the related reopening of some countries could shave off around 1mn b/d of oil demand recovery growth in 2021.
If vaccination targets are not met and most global economies keep shut, postponing expected withdrawals of lockdowns, the development would stunt the expected bullish crude inventory rally as we enter the summer months.