OPEC Looms will Vaccine Supports Oil Markets

Oil markets

Spreads are at their narrowest in months, reflecting the shift in the production/demand balance on a combination of factors:

• Lower production by OPEC+ countries.
• Numerous weather-related shut-ins in the Gulf of Mexico.
• Asia’s increased purchases (China binged on cheap oil in the first half of the year).

Calendar spreads are down along the Brent curve, from mid to the end of 2021 are now below $0.10 contango. And really, that is the key to holding the front end in check.

As John Kemp (Reuters) puts it: “such contango would not cover the cost of storing and transporting crude, implying that stocks are expected to be below the five-year average and falling rapidly at that point.”

Rising COVID cases and restrictions tempered the enthusiasm around good vaccine results. Still, we should not expect to see the same playbook for downside oil market risk that we saw with the second COVID wave in Europe – not only were the vaccine results excellent (which should soon lead to Emergency Use Authorizations), but rising cases are elevating expectations around Fed action at the upcoming 16 December meeting, when they may conduct a QE twist that will do much of the oil market heavy lifting due to inactivity on the stimulus front l.

But it is all down to OPEC. No formal decision will be taken before the full OPEC+ ministerial meeting at the end of this month. Still, with the rise in coronavirus infections and new mobility restrictions, it seems al but like a rubber stamp kind of likely that an extension will be undertaken

Vaccine progress or not, the market is riveted to OPEC activities. The broader market is very aware that even the most promising vaccine news will not have a discernable effect on oil demand until at least the second half of 2021. But what will have an immediate impact on the oil market – or rather bring into better equilibrium the balance of supply vs. demand by drawing down inventory more definitively – is an OPEC quota extension.

As we count down to the meeting of OPEC on November 30th, the Axi Expert Series is pleased to welcome Henning Gloystein, Director of Energy, Climate & Resources at Eurasia Group, to discuss his views and insights in what’s an important week for oil markets.