‘Fundamentals stay unchanged’

Global oil demand will rise in 2021 but won’t surpass 2019 levels, considers S&P Global Platts adding that the coronavirus pandemic continues to weigh on transportation fuel demand. According to Global Head of S&P Global Platts Analytics Chris Midgley, oil demand will rebound by more than 6 million bpd in 2021, but consumption is still expected to be more than 2 million bpd lower than in 2019, when it amounted to 101,9 million bpd. The outlook presumes a recovery in global gross domestic product as well as an acceleration of growth in the second half of 2021.

“While in the long-term we are more optimistic about a rebound of oil demand causing us to upwardly revise our 2021 demand outlook, in the short term, we expect things to worsen,” said Midgle pointing to second-wave lockdowns in the US and Europe and much weaker gasoline demand across the holiday season. “We see domestic flights improving, but we don’t see international flights growing,” he added. Thus, jet fuel is expected to remain the laggard and keep refineries operating more in gasoline production mode in the first half of 2021. This year, kerosene and jet fuel demand have represented more than a third of the overall demand decline (about 3,1 million bpd out of the total loss of 8,7 million bpd).

Although the rollout of coronavirus vaccines has created a wave of optimism across commodity markets, fundamentals stay unchanged, considers Midgley. Platts’ analysts expect global supply to increase by more than 3 million bpd next year after declining about 7 million bpd in 2020. According to Midgley, OPEC+ will be dominant at the beginning of 2021, while US shale production is set to decline until the middle of the year. Russian oil output is forecast to grow 400,000 bpd by the end of the next year.

The analysts expect oil prices to “struggle a bit” in the first half of the year amid the reemergence of coronavirus-related shutdowns in March and April. They believe that Dated Brent will get closer to $40 per barrel in the short term but move back towards $50 per barrel by the end of 2021. “We feel the current price of $50 per barrel is probably $10 higher than warranted. Oil prices are up right now but it’s really on sentiment rather than fundamentals,” explained Midgley.

As for refiners, they will probably stay under pressure, as demand is not increasing fast enough to absorb all the spare capacity in the market. Growth in refining capacity, largely in the Middle East and Asia, will be far larger than an expected rebound in the refined product demand in 2021. Besides, more natural gas liquids and biofuels are being produced, which basically substitutes the need for refined products. “This will squeeze margins of existing refineries, particularly if demand recovery for transportation remains sluggish,” said Midgley.