Optimism Oil Market not Based on Fundamentals? IEA Cautious about Demand Recovery 2021

At present, most power brokers seem to be fed by optimism about the perceived effects of starting COVID-19 vaccines programs, and a possible resurge of economic activity. Looking at main markets in Europe and the USA, fundamentals are however very weak, especially if taking into account the resurge of national lockdown programs, such as in the Netherlands, Germany and UK. On the sidelines, COVID-has also removed almost all negative news from a possible NO-Deal Brexit on January 1 2021.

It is almost incomprehensible to see the total lack of rationality in certain parts of the market, European lockdowns are a precursor for more economic downturn, while Asian demand is in a globalized world for a large part depending on demand for products in Europe. The American lost battle against COVID is still ongoing, even that US based news is full of largescale vaccine programs, the latter will not have a direct and immediate effect on economic recovery.

Since the last OPEC+ meeting and the partial roll-over and easing of the production cut agreement, optimism even got stronger, as the oil cartel and main participants supported a positive vibe. Still, some critical assessments are currently hitting the market, as worries are growing over the 2021 market situation. The Paris-based OECD-energy watchdog International Energy Agency (IEA) already has cut its oil demand forecast today for 2020 and 2021.

The latter contradicts the optimism in the market, as the IEA calls for much more caution in the assessments of COVID vaccines effects and already underlying looming economic crisis outcome. The Paris based watchdog reiterates that it “will be several months before we reach a critical mass of vaccinated, economically active people and thus see an impact on oil demand.” At the same time, the IEA Monthly Oil Report (OMR) keeps some optimism, showing it is struggling with the current situation, as it reports that stronger Asian demand and persistent and effective OPEC+ supply management had aided the recent recovery in oil prices and on the physical oil markets.

The energy agency is partly optimistic because it sees a real shift in the oil storage situation, now showing 1.7 million bpd build for 2020 but changing to a 1.8 million bpd draw in 2021. The latter should however be taken very cautiously, as prices could push production up higher, compliance of OPEC+ s already under severe pressure, while an economic recovery in 2021 globally is still looking very fragile, based on national lockdowns in wide parts of the EU, UK and possibly other places.

When looking at oil demand, the IEA sees an 8.8 million bpd decrease for 2020, which is 50,000 bpd cut from its previous forecast. Overall IEA reports a strong oil demand growth of 5.7 million bpd in 2021, bringing global demand to 97.1 million bpd, an increase of 170,000 bpd compared with the November OMR. The latter is still not very strong, if you take into account that several OPEC+ members have indicated to be opening up their production higher, and prices around $50 per barrel would also support some additional shale revamp.

Demand, even if taking the IEA statements, will only recover by 66% in 2021 in comparison to 2020. The current lockdown scenarios, and loss of high travel related fuel consumption, looking at winter holidays Europe or shopping/family gatherings, which all are blocked, will have their own impact still.

By putting all 2021 demand increase on COVID-19 vaccines programs it is very tricky one. The effects are still not clear, logistics and country-wide coverage is still a major challenge. At the same time, a prolonged economic and social restriction in major markets is also increasing the total negative fallout on the economy long-turn. Financials are already looking very black, while unemployment is kept low due to EU subsidy programs.

There is also a major Trojan Horse some don’t yet see or are ignoring. OPEC+ is struggling to keep its pace. With already severe cracks showing in the battle walls of Troy, a strong opposition current is building up inside of OPEC itself.

Led by the UAE, but also supported by other members such as Iraq, Libya, Iran and Nigeria, the cartel needs to find a solution to its own Catch 22 situation. By keeping the market in check, prices are able to recover slightly. However, the costs are on the shoulders of OPEC members, which are all struggling to finance not only their own government programs but also need to prepare for a more non-hydrocarbon based future.

The costs are high, for some already unbearable. Without getting higher revenues, some of them could be facing instability. Others are also looking at the looming Peak Oil – Peak Demand scenarios in the media. Stranded assets and continued low income are a nightmare scenario for most. To prevent, oil producers could easily jump from a rational market stability approach to an all-out unilateral power game.

Perceived stability and demand – supply scenarios used presently are too rigid to be taken face-value. Instability is hiding in the Trojan Horses standing in plain sight on the streets in front of OPEC Vienna HQ, NYMEX buildings or the CME in Chicago.