In Unstable Oil Market, Analyst Says Stick To Status Quo, Hold Out For COVID-19 Vaccines

Full or partial pandemic lockdowns this winter could put oil demand at more risk, OPEC's Joint Ministerial Monitoring Committee panel said Monday. 

The OPEC committee should stick to cuts that are now in place and hold out for COVID-19 vaccines, said SEB commodities analyst Bjarne Schieldrop — or risk damaging the oil market with high inventories for another one or two years.

“In the main scenario, the market would be able to swallow the additional 1.9 million barrel per day from OPEC+ from January 2021 onward, assuming a further gradual recovery in global oil demand,” the analyst said in a note. 

A Second COVID-19 Wave And Oil: The combination of a second wave of coronavirus infections and an increase in Libyan oil production could leave the market with a huge surplus in the first half of 2021, Schieldrop said. 

"The gravity of the situation and this possible 4m bl/day surplus scenario in H1 2021 is at the heart of today’s JMMC discussions," the analyst said.

"So far, there are no signals that plans have changed and we know from March when Saudi Arabia and Russia fell apart that Russia is not at all keen to keep on cutting and would rather keep producing at a normal steady pace with small, marginal annual growth, but the logic now is different." 

COVID-19 Vaccine Expectations: The market’s expectation is that different COVID-19 vaccines will be released during the first half of 2021, liberating the global economy to a great extent — and oil demand as well, Schieldrop said. 

“It therefore makes sense to keep holding back supply for longer through Q1-Q2 2021 because salvation might come to OPEC+’s rescue by mid-2021 in the form of vaccines,” the analyst said. 

If OPEC+ allows the market to run a large surplus in the first half of 2021, it could risk damaging the oil market for another one to two years with even higher inventories and depressed spot oil prices, according to SEB. 

The next OPEC+ JMMC meeting is scheduled for Nov. 17.

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