Key takeaways 

 

•        Stripping out US & China, satellite data shows crude oil stocks are almost back to normal, just 46mn bbls above 2017-19 avg

•        Against a sharp collapse in energy capex and the prospect of improving demand, oil markets face unprecedented money creation

•        Brent could easily rally to $60/bbl next year and flip into backwardation, if OPEC+ compliance holds and the pandemic eases

 

 

Brent crude oil prices are on track to hit $60 in 1H21

 

Back in June (see The third time's a charm for oil), we upped our oil price forecasts by $5/bbl and argued that Brent would average $43/bbl in 2020 and $50/bbl in 2021. Since then, spot oil prices have remained more or less range-bound. Yet balance of the year and Calendar 2021 Brent and WTI prices have picked up steadily at a slightly faster pace than we anticipated. Cal21 Brent rose to near $48/bbl this week from the sub $35/bbl April lows and longer dated tenors are also rising. What is fueling forward prices? First, confidence in OPEC+ compliance. Second, a collapse in US shale output. Third, a steady global oil demand recovery. Looking forward, we see these trends continuing. Thus large deficits of 4.9mn b/d in 4Q20 and 1.7mn b/d in 2021could appear in global oil markets.

Stripping the US & China, crude stocks have normalized

 

Delayed OECD inventory data shows that stocks are still well above 5yr average level, so isn't the market running a little ahead of fundamentals? No, satellite data suggests that declines are happening sooner and faster than we expected. Stripping out America and China, global crude oil stocks are almost back to normal, with inventories now below the 2016 highs and only 46mn barrels above the 2017-19 average. That's a fascinating figure if we consider that America and China are locked into the greatest geopolitical power race since the end of the Cold War. Put differently, China's stock increase is likely permanent. And while America's commercial stocks are driven by economics, not policy, the big drop in shale also means that US may need higher precautionary inventories.

 

If 2nd wave is avoided, focus may shift to deep capex cuts 

 

The bottom line is that the crude market is tighter than it appears, even if mobility in OECD economies remains subdued due to the coronavirus. Yet, fuel demand in China and India has been recovering. Car sales are picking up all around the world. And global fixed asset investment in the broader macro economy has fallen sharply (see Quantamental Insights: How to position for rising inflation, 11 August 2020). Also, the world oil and gas rig count has already collapsed. Further, Aramco this week announced a 50% capex reduction. Against a crushed energy sector and the prospect of improving demand, we have unprecedented money creation. OPEC's resolve will partly dictate the pace of oil stock draws, but we believe Brent prices could easily rally to $60/bbl next year. Backwardation, if oil keeps rallying, could kick in by 1Q21. This baseline view assumes we avoid a major second COVID-19 wave in 4Q20.