Vaccine deployment and Saudis’ voluntary cuts support crude market
At the end of 2020, oil markets perked up fuelled by the news on vaccine approvals, but this month, their optimism has faltered due to the persistent spread of the virus. Nonetheless, most analysts consider that demand for crude will recover in the second half of the year.
Despite COVID-19’s recent resurgence in several countries, analysts expect a recovery in oil demand and prices this year, says S&P Global Platts adding that oil markets are watching a tug of war between the virus and vaccine deployment. According to Goldman Sachs, Brent crude may rise to $65 per barrel by the middle of 2021, which is six months earlier compared to their previous forecast. UBS Group has also revised its forecast for Brent upwards to $60 per barrel by mid-2021.
S&P Global Platts Analytics expects Dated Brent to stay slightly above $50 per barrel for much of 2021 with stronger support in the second half of the year. The agency forecasts oil demand to grow by 6,3 million bpd in 2021 compared to the previous year with growth concerning all regions and different products. “Overall, optimism on global economic growth outlook on the back of reasonably well developed and effective vaccines is the main driver of this demand forecast,” commented Kang Wu, head of Global Demand, Risk and Asia Analytics at S&P Global Platts.
This month’s surprising decision of Saudi Arabia to unilaterally cut 1 million bpd of production starting from February has also supported this optimism. “Despite the [demand-side] risks, we believe Saudi and OPEC+ actions have put a new price floor of $50 per barrel for 2021. As a result, we believe a modest upward revision to our price outlook is justified for Q1 2021,” said Global Director of Analytics of S&P Global Platts Chris Midgley.
It seems that Saudis’ action also brought diplomatic success helping to revive strained relations with Russia. Deputy Prime Minister of Russia Alexander Novak called the kingdom’s decision a “New Year’s gift” to the oil market. Later, Saudi Arabia’s Foreign Minister Faisal bin Farhan said that Saudi Arabia valued the cooperation with its partners within OPEC+, on top of them Russia, and looked forward to continued cooperation.
However, downside risks to the global oil market are rising amid the second wave of lockdowns across Asia and particularly in China. The latter, which is considered to be a leader of the recovery, has witnessed a resurgence in cases this month, which has resulted in new restrictions and lower demand for transportation fuels. Japan has also expanded its state of emergency in January, as well as Malaysia and Indonesia. At the same time, India’s economy seems to be back on track with oil demand growing for four months in a row.