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Eithne Treanor: November 21 Weekly Oil Wrap

Published: 10:30 24 Nov 2020 GMT

Capital Economics -

The oil price maintained strength last week as more reassuring news of the COVID-19 vaccine emerged but new cases mounted and additional lockdowns were introduced. In Friday trading, Brent crude was priced close to US$45 with WTI holding above US$42 a barrel.

The long term focus is definitely bullish with expectations that the economy and the market will improve. As the markets are often driven by sentiment, Commerzbank said in a note, “concerns about demand, which have been weighing on prices since the spring, are now giving way to hopes of economic recovery, thanks in part to the imminent rollout of vaccines.”

The OPEC Joint Ministerial Monitoring Committee met to examine recommendations to the Ministerial meeting at the end of this month.  Speaking in advance of the private on-line gathering, Saudi Energy Minister Prince Abdulaziz bin Salman said he could see, “some glimmer of light at the end of the tunnel,” thanks to news of the vaccine. The committee also stressed the need and “critical importance of adhering to full conformity and compensating the overproduced volumes, in order to achieve the objective of market rebalancing.”

While we hear of occasional new economic initiatives, like a possible additional stimulus deal in the US; the world is feeling little relief or signs of true recovery. Jobless claims in the US continue to rise to stand above 20 million people. The president of Prestige Economics, Jason Schenker says he’s hopeful for the future. “Despite significant risks of a sharp rise in joblessness in coming weeks, a surge to peak levels of initial and continuing jobless claims levels seen earlier this year seems unlikely.”  Schenker also reminded us that this means that “current total jobless claims is the first week since March 21st that is below the worst week in the Great Recession 2007-2009,”  adding that the “persistently high level of joblessness continues to risk adding drag on the economic outlook.”

It will still take time before global oil demand solidifies as a result of the news of the vaccine, but it certainly helps. The CEO of CMarkits, Dr. Yousef Alshammari says, “traders look at demand as coming back so there is more appetite to invest in crude oil contracts.”  No one is expecting any wild fluctuation in price, but the general feeling is one of optimism. The chief commodities economist from Capital Economics, Caroline Bains said, “ a rapid roll out of an effective vaccine suggests that economic activity, particularly in the US and EU, would be stronger than otherwise, which is positive news for most industrial commodities.”

The general feeling among the analyst community is that OPEC+ will stay the course and maintain oil production at current levels. The wider group will meet on 1st of December to ratify the OPEC decision a day earlier. Its expected they will roll over until March, when they will meet again to re-assess the situation. Capital Economics expects no change noting that “the price spread between the front and second month Brent crude contract moved to its narrowest level since July, which suggests that supply will remain constrained for longer.” If OPEC leaves supply unchanged, then this “should offset some of the near-term weakness in demand.”

With less oil on the market, stockpiles of crude and petroleum products in the US are declining, according to the Energy Information Administration. Excessive inventories have been a continuous strain on the global fundamentals. There’s talk that come close of 2021 or even earlier, we might see a sense of balance return to the oil market. According to Reuters, commercial crude stocks remain 31 million barrels or 7 percent above the 5-year average with distillates about 19 million barrels above the average.

No further supply from OPEC+ will help but holding back production is costly. News of the vaccine delivers hope to millions but a sustained sluggish economy will cause more demand destruction; a situation not welcomed by oil producers.

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