The gradual healing of the oil market is likely to continue
Although there have been positive developments on a global scale—daily new coronavirus cases have stabilised, daily fatalities have declined—the continuing lack of a proper cure or vaccine and the fear of a new flare up as winter approaches in the northern hemisphere continue to weigh on sentiment, while high-frequency data confirm that the global economy has not completely recovered from the pandemic. Mobility trackers have moved sideways since mid-June, with a surge of cases in several countries forcing authorities to impose new social-distancing measures. Indicators show that international trade and global activity are still below normal.
However, thanks to the easing of lockdowns in most countries, global oil demand has recovered quite significantly. Many travel-related sectors are still impaired (air transport, passenger cruises, tourism in general), explaining why oil demand is still 8 million barrels per day (mbd) below the end-2019 level. These sectors are not expected to recover rapidly unless there is a quantum improvement on the covid-19 front.
But while oil demand is not expected to recover fast, we do not see the market reverting to oversupply soon. The oil market tends to self-correct, with overproduction very quickly matched by a decline in prices. Thanks to OPEC+’s production restraint and the massive fall in the US shale oil industry’s daily output (-1.9mbd), oil supply has not matched the 13.4mbd bounce in oil demand in the last four months.
As a result, the oil market is estimated to be currently undersupplied by 3mbd. This state of affairs is likely to endure in Q4, offering support to oil prices. We do not see the market moving back into oversupply and thus hurting prices. OPEC+ is likely to maintain its disciplined approach to output while an US shale oil industry badly hurt by the crisis is unlikely to match past levels of production any time soon. We therefore see the Brent price reaching USD50 per barrel in H1 2021 and USD55 at end-2021 compared to today’s price of around USD40.