AUTUMN PRICE FALL

The second wave of the COVID-19 pandemic with lockdowns in many countries and the presidential race in the United States became a kind of swinging factor for global oil prices this autumn. Although the OPEC+ member states continue cutting oil production according to the previously reached deal, fears on the prospects of oil demand are increasing due to expected lockdowns in several European countries, as well as the increasing COVID-19 cases in the United States.

The end of hostilities in Libya added to the uncertainty on the global oil market, contributing to the growth of oil production in the country. The production volumes of the Libyan oil exceeded 1 million barrels per day, which is the maximum since December 2019.

Analysts do not expect an early recovery in oil demand to the pre-pandemic level, but expect prices to rise above $50 per barrel already in 2021.

Vaccine of optimism

In May-August, oil prices recovered continuously after a significant collapse in January-April. In early August, the price of Brent crude exceeded $45 per barrel for the first time since March.

However, oil prices began to fall at the beginning of the autumn season: Brent lost almost 10% of its value in September and 8% in October, while the North Sea oil mixture (WTI) - 6% and 11%, respectively. As a result, oil quotations in October fell below the psychological mark of $40 per barrel, losing the entire gain of the last three months.

On the last working day of October, global oil prices fell to June lows, dropping to nearly $35 per barrel. The price of January futures for WTI fell to $37.6 per barrel, and for December futures - to $35.8 per barrel. And the cost of January futures for Brent on November 11 rose to $45 per barrel for the first time since September 2, for December futures for WTI - up to $42.66 per barrel.

The prices of benchmark oil types continue to rise due to optimistic news about the coronavirus vaccine development, which outweighs concerns about the outlook for oil demand. Investors hope the vaccine will have a positive impact on the global economy and the demand for raw materials. Its appearance, in particular, will allow countries to lift quarantine restrictions and lift bans on movement, which will support fuel demand.

“In the oil markets, the development of vaccines could shift the focus from the short-term issue of supply and demand to how the oil market can handle the recovery in demand in 2021. This could help nudge governments towards easing the lockdown regimes,” Callum McPherson, Investec's Chief of Commodities said.

The prices also remained stable due to the clarity regarding the outcome of the US presidential elections. Investors believe that J. Biden's arrival at the White House will increase the likelihood of a new large-scale package of measures to support the national economy that will help it cope with the consequences of the COVID-19 pandemic.

Everything's under control

Although the decline in October did not cause serious panic among market participants, as expected, the process was strictly monitored by the OPEC+ member states.

In mid-October, Russian Deputy Prime Minister Alexander Novak, who previously served as Russia's Energy Minister, stated that prices on the global oil market correspond to the current situation. “Today there are no ‘black swans’ or special factors that would cause sharp increase or decrease in prices. Considering the balance of supply and demand, it is the market that determines the prices,” Mr. Novak said.

However, at the online oil and gas conference ADIPEC, the Saudi Minister of Energy, Prince Abdel Aziz bin Salman, speaking about OPEC+ plans for 2021, said that the parameters of the deal could be adjusted if necessary. Moreover, this adjustment may turn out to be stronger than the market expects. “This change may exceed what analysts expect. We control the development of the situation,” bin Salman said.

The updated OPEC+ agreement on the reduction of oil production has been in effect since May 2020. The first stage of the deal, when the member states reduced production by 9.7 mbpd, ended in August. From September until the end of this year, the reduced production volume will be 7.7 mbpd. From January 1, this volume will reach 5.8 mbpd. The OPEC+ deal is valid until April 2022; the next term is planned to be discussed at a ministerial meeting in December 2021.

By the way, experts expect that OPEC+ will extend the current level of production cuts by 7.7 mbpd even after January 2021. “New restrictions in Europe temporarily restrict oil demand, but this should be offset by the increased global demand, especially in Asia. Exports from Libya grew faster than expected, but oil producing countries are likely to postpone production restrictions (to 5.8 mbpd, R+), which will provide room for additional oil volumes without affecting the market balance," Mr. Norbert Rücker, Chief Macroeconomist and Head of Advanced Research Next Generation Julius Baer.

So far, there is no consensus among the main OPEC+ member states on the further extension of the deal on current terms in 2021. According to Interfax, Russia is not ready to strengthening restrictions. The country will at most extend the current terms of the deal for the first three months of 2021.

“There is currently no need to discuss this topic. There will be a JMMC (Joint Ministerial Monitoring Committee), where we will discuss the issue,” Mr. Novak said answering the question whether Russia is ready to support proposals to further oil cuts by the OPEC+ member states in January 2021.

Back in October, Mr. Vladimir Putin, speaking at the plenary session of the Valdai Discussion Club, also noted that there was no need to change the deal, but he did not rule out extending or deepening the restrictions in the future.

“As for the oil demand and our work within the OPEC+ framework, we are in contact with all our partners, both the Americans and the Saudis. We believe that now we do not need to change anything, but we do not rule out that we can either keep the current restrictions, not remove them as quickly as we expected to do it earlier. If necessary, we may take other decisions on further cuts. But so far, we do not see such a need,” Mr. Putin noted.

The OPEC+ ministerial meeting is scheduled for December 1. On November 30, there will be a conference of the OPEC states. The meeting of the OPEC+ technical committee is scheduled for November 16, with the JMMC meeting on November 17.

Biden's victory and oil demand

In the medium term, the policy of the new American president may lead to an increase in the world supply of oil and put pressure on its consumption in the transport segment, which forms more than 60% of all demand.

Under a Democrat president, the US could resume talks with Iran on the nuclear issue and ease restrictions on the Islamic Republic's oil and gas exports.

Prior to the US withdrawal from the nuclear deal in May 2019, Iran produced 4.5 million bpd. As soon as exports were blocked, a significant part of the production was closed. “At the moment, Iranian production is 2.5 million bpd. The reserve capacity was kept at the level of 1.8 million bpd. If anti-Iranian sanctions are lifted, a significant part of this oil could flood the market. Rystad's analysis suggests that Iranian production will grow 1.2 million bpd by the end of 2022. This scenario is fraught with a high degree of political uncertainty, but it looks very real,” quotes an analyst at BCS Express in his review of Rystad's assessment.

American banks including Goldman Sachs Group Inc., JPMorgan Chase & Co. and RBC Capital Markets Llc. Believe that if 1 mbd or more of Iranian oil hit the market next year, it can make global oil prices drop significantly.

Rystad does not rule out similar indulgences from the US regarding sanctions against the Venezuelan PDVSA. Under J. Biden, investments in Venezuela may become less risky for Russia and China. The agency estimates the potential growth of Venezuelan production by 2024 at 0.7-1.2 mbpd.

Another blow to the US oil consumption could come from clean energy development. J. Biden promised to allocate about $400 billion for ‘green’ technologies over the next ten years. They can be invested in infrastructure for recharging electric vehicles, go to financial incentives for consumers of electric transport, and the development of high-speed railways.

At the same time, in some sectors, such as aviation, where oil substitution is too expensive or technologically difficult, there may be a steady growth in oil demand until the mid-2020s, regardless of the initiatives of J. Biden.

Price stability

An assessment of the current situation suggests that oil prices by the end of this year will remain in the range of $40-50 per barrel. There are no prerequisites for a serious shift. If the OPEC+ member states decide to continue to cut oil production in 2021 under current conditions, or even deepen it, this will give an additional impetus to the market and allow the price to jump over the $50 per barrel. It also largely depends on the development of the coronavirus situation, which has a serious impact on the fuel demand. So far, according to experts, there is no need to wait for a complete recovery of air transportation in the next two years. At the same time, an increase in the use of personal means of transportation and, accordingly, the demand for motor fuel is not excluded.

Experts at JPMorgan Chase call for caution, predicting that global demand for oil will not return to pre-viral levels by the end of next year.

Moscow has a similar opinion. “I think that the return to 100 million barrels of oil per day will take about two to three years,” Pavel Sorokin, Deputy Head of the Russian Ministry of Energy, said. He believes that one should take into account the "positive cooperation" of the OPEC+ participants and their responsible behavior.

The US Department of Energy expects the price of Brent to remain at $40 per barrel until the end of the year. According to forecasts of the Department’s Energy Information Administration (EIA), the average price for Brent crude in 2021 will be $47 per barrel.

In its November review, the EIA notes that spot prices for Brent crude in October averaged $40 per barrel, which is $1 less than in September. Brent prices fell in October as oil production in Libya had resumed earlier and COVID-19 cases began to rise in many countries, which could reduce oil demand in the coming months.

“Despite these developments, EIA expects global oil reserves to continue to decline in the coming months. However, the EIA expects that high levels of world oil reserves and excess production capacity will limit upward pressure on oil prices, and that Brent crude prices will remain at around $40 a barrel until the end of 2020,” the report said.

The EIA expects that as global oil demand rises, projected inventories will decrease in 2021, which will push oil prices upwards.

Investment and bank analysts also hope for rising oil prices in 2021. According to Saxo Bank, the oil market will remain in the current price range: Brent will hold between $40-$50 per barrel and may rise above $50 only in the first half of 2021.

Vahid Alekperov, head of the Russian LUKOil, also agrees with this forecast and believes that in the coming months the current oil price will remain at $40 per barrel. In 1Q2021, the price of Brent may hit $50 per barrel.

Citi Research, the research arm of Citibank, predicts Brent and WTI prices for 2021 at $54 and $49, respectively.

The most optimistic is the forecast of BofA Global Research, which admits that the price of Brent may rise to $60 per barrel in 1H2021 due to a shortage of raw materials in the market, which is likely already in the fourth quarter of 2020.

According to analysts, among the key factors contributing to the rise in oil prices are investor confidence in OPEC + member states' compliance with the terms of the current deal, a drop in production from shale deposits in the United States and a steady recovery in global oil demand. BofA Global Research's forecast is based on the assumption that the world will be able to avoid a massive second wave of the COVID-19 pandemic in 4Q2020.

In short, the future of oil prices now depends on OPEC+ and the vaccine development companies. Correct decisions of both parties can give a good result for the oil market, since the standby mode is on for now.