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Oil Market Report - December 2020

EXECUTIVE SUMMARY

Crude oil prices rallied in the month of November 2020 to reach their highest levels since March. Both the ICE Brent and the NYMEX WTI benchmarks climbed 5.9% and 4.5%, respectively, on a monthly average, recording their biggest monthly rise since July. Crude oil was buoyed by COVID-19 vaccine developments, which brightened the outlook for global oil demand and offset concerns about the rise of infections in several regions. The outlook for global oil market fundamentals also improved as investors anticipated a potential delay in the planned easing of the DoC crude oil production adjustments, healthier oil demand data in some countries, and higher-than-expected economic data in the US and in some Asian countries. Thus, in China, National Bureau of Statistics data showed that crude oil refinery throughputs increased 2.6% in October compared to the previous year, and domestic oil demand was expected to strengthen during holiday travel. Traders turned more positive after China released higher crude import quotas for Chinese independent refiners for next year, which could increase demand for January loadings. Furthermore, data from Japan showed a sharp recovery in the economy in 3Q20 amid strengthening exports and domestic consumption. In the US, a survey by the Institute for Supply Management reported higher-than-expected manufacturing activity in October. Strong equity markets and a weakening US dollar also supported crude oil prices.

Nonetheless, the rise of crude oil prices was capped by concerns about the impact on short-term oil demand recovery of the rise of global COVID-19 infections and the recent lockdowns in Europe, while the full recovery to pre-COVID-19 conditions could take more time than anticipated. By late November, oil prices steadied amid quiet trading in observance of the US Thanksgiving holiday and as investors awaited the outcome of the 12th OPEC and Non-OPEC Ministerial Meeting.

The Meeting met expectations of market participants and agreed to reconfirm the existing commitment to gradually return 2 mln bbl / d and decided to voluntary adjust production cuts by 0.5 mln bbl / d from 7.7 mln bbl / d to 7.2 mln bbl / d, starting January 2021. Furthermore, OPEC and Non-OPEC countries participating in the DoC agreed to assess market conditions and decide on further production adjustments on a monthly basis, with monthly adjustments being no more than 0.5 mln bbl / d. So, crude oil market received another portion of bullish arguments and continued to rally during first two decades of December as well. The ICE Brent benchmarked finally climbed above the threshold of $50 / bbl, for the first time since the OPEC and Non-OPEC Meeting in early March 2020, when the previous DoC agreement felt to dust and Saudi Arabia promised to flood the market with its oil. Further positive news of COVID-19 vaccine rapid developments also helped crude oil prices to rose further above $50 / bbl, as well as hopes for another fiscal stimulus in the USA, encouraging investors’ risk appetite and pushing prices of all risky assets to the North. So, both the ICE Brent and the NYMEX WTI benchmarks ended the period under report at their highest levels since early March 2020 of roughly $51.4 / bbl and $48.3 / bbl, respectively.

A total output of crude oil by the OPEC states as a whole in November 2020 continued to grow for the 2nd month in a row and expanded by another 530 thsd bbl / d in comparison with the volume of October 2020, or +2.2% MoM. A crude oil production by the cartel in November reached its maximum level over last 7 months and finally climbed above the threshold of 25.0 mln bbl / d. The only reason behind cartel’s strongly positive monthly production performance in November was a recovery of crude oil output in Libya, where the production of oil skyrocketed by 133.3% MoM, or +600 thsd bbl / d in compare to the volume of the previous month, as warring parties in the country signed a historic ceasefire on October 23, 2020 after many months of civil war that resulted in main oil exporting terminals reopening. As the 2nd stage of the historic OPEC+ deal that was forged in April 2020 expired this month, the 12th OPEC and non-OPEC Ministerial Meeting was held on December 3, 2020 to work out a new agreement. The Meeting recalled the previous decision taken at the Extraordinary 10th Ministerial Meeting on April 12, 2020 to adjust downwards overall crude oil production and the unanimous decisions taken at the 11th Ministerial Meeting on June 6, 2020. In light of the current oil market fundamentals and the outlook for 2021, the Meeting agreed to reconfirm the existing commitment under the Declaration of Cooperation (DoC) decision from 12 April 2020, then amended in June and September 2020, to gradually return 2 mln bbl / d, given consideration to market conditions. Beginning in January 2021, DoC participating countries decided to voluntary adjust production cuts by 0.5 mln bbl / d from 7.7 mln bbl / d to 7.2 mln bbl / d. Furthermore, DoC participating counties agreed to hold monthly OPEC and non-OPEC ministerial meetings starting January 2021 to assess market conditions and decide on further production adjustments for the following month, with further monthly adjustments being no more than 0.5 mln bbl / d. The Meeting also agreed to extend the compensation period until the end of March 2021, to ensure full compensation of over production from all DoC participating countries.

A cumulative oil production worldwide in November 2020 continued to recovery for the 6th month in a row and expanded by solid another 1.8 mln bbl / d in compare to the level of October 2020, or +2.2% MoM. Nevertheless, in absolute terms the volume of a total oil production around the globe remained very humiliated from a retrospective point of view. Before COVID-19 pandemic, comparable amounts of oil were produced in the world as a whole as early as in 2011. So, that was not a surprise that from a year-over-year standpoint performance of a total oil output around the globe in November 2020 proceeded to be very discouraging thanks to a preceding collapse of the production. More exactly, a global output of oil in November 2020 was nearly 8.6 mln bbl / d lower than it was in the same month of the previous year, or -9.2% YoY. The most part of non-OPEC oil producing countries showed a positive dynamic of oil production in November 2020 in compare to October 2020. In absolute terms, the most material expansion of the output was registered in the USA. To be more precise, an oil output in the USA ramped up severely in November by 489 thsd bbl / d, or +4.90% MoM. However, on a relative basis, the most significant growth of crude oil extraction in November 2020 was exhibited in Malaysia. Crude oil production in this South-East Asian country kept on to grow for the 2nd month in a row and expanded by 39 thsd bbl / d, or almost +9.0% MoM. Canada also showed a significant growth of oil output in the month under review. A production of crude oil in this state moved upward for 3 months in a row and increased by 7.0% MoM, or +294 thsd bbl / d relative to the volume of the prior month, to the maximum level on record equal to 4.48 mln bbl / d. Such countries as Norway and the United Kingdom demonstrated an impressive improvement of their crude oil production in November 2020 as well. Thus, an extraction of crude oil in Norway ramped up within the month under review for the second consequent month and grew by 99 thsd bbl / d, or +6.1% MoM. The United Kingdom demonstrated a little bit less strong expansion of the output in the month of November, a crude oil output in the country went up for 3 months in a row and expanded by 41 thsd bbl / d, or +5.4% MoM. Likewise, Colombia, China and other Ex-USSR states were the countries with growing crude oil production on a monthly basis in November 2020. On the other hand, there were a number of major oil producer among non-OPEC states that reduced their production levels in November 2020 in contrast to the previous month. In absolute terms, the most formidable contraction of output of oil among non-OPEC oil producing states in November 2020 was observed in Brazil. A production of crude oil in this country experienced a decline of 76 thsd bbl / d, or -2.6% MoM.

In November 2020, a total oil production in the USA went up considerably by 3.6% MoM, or +375 thsd bbl / d relative to the volume of October 2020 and reached the highest level over last 4 months. On a month-over-month basis, a production expansion rate also speeded up to its peak pace within last year. Notwithstanding to a positive monthly production data, it is worthwhile to remind that just before the start of COVID-19 pandemic a total oil production in the USA had reached its historical maximum of marginally above 13.0 mln bbl / d. Comparing to that level, a total oil output in the country in November 2020 was lower by 2.15 mln bbl / d, or -16.5%. The same time, a total shale oil output in the USA as a whole was nearly flat in monthly terms and barely increased by 1 thsd bbl / d. In yearly terms, a total shale oil production in the country naturally exhibited a decline of 13.7% YoY, or -1.28 mln bbl / d relative to the level of November 2019, thanks to a collapse of the production during the 2nd quarter of 2020. As for a yearly movement, a cumulative output of shale oil in the USA showed an annual decrease for 7 consequent months. Also, there is a sense to note that shale oil production numbers in the USA in recent month were much less volatile comparing to dynamics of an overall oil production in the country, an uncommon situation in pre-COVID times. All the shale oil deposits showed a negative change of production of shale oil in month of November 2020 as contrasted with October 2020, except for Eagle Ford and Permian. The most material monthly contraction of output of shale oil in the month under review was registered on Bakken deposit.

The IEA again revised down its near-term global demand outlook in its monthly report for December 2020. According to the agency, in the short term, oil demand will remain weak and it has reduced its estimate for the fourth quarter of 2020 by 0.2 mln bbl / d on small data revisions in various countries. For the year as a whole, global demand will be equal to 91.2 mln bbl / d, which is 8.8 mln bbl / d below the 2019 level and down 0.1 mln bbl / d from the IEA previous forecast. Global demand for oil has recovered from its trough in the second quarter when it was 16.3 mln bbl / d (16.4%) below the year-earlier level, but in 4Q20 it remains 6.2 mln bbl / d down year-on-year, reflecting the impact of the second wave of lockdowns. The recovery in the second half of 2020 was almost entirely due to China’s fast rebound from lockdown. Demand there will grow by 0.7 mln bbl / d in the period. The picture in OECD countries is bleak: in the same period demand will be 5.3 mln bbl / d lower than a year ago. Indeed, Europe appears to be going backwards with demand in 4Q20 lower than in 3Q20 as re-imposed lockdowns take their toll. Globally, weakness in the aviation sector largely explains a downgrade to demand forecast of 0.3 mln bbl / d for the first half of 2021. This contributes to a smaller rebound in demand in 2021 of 5.7 mln bbl / d.

Total commercial stocks of crude oil and oil products in OECD states continued to normalized in September 2020 for the 2nd month in a row and declined by another 47.0 mln bbl in comparison with August level, or -1.5% MoM. On a year-over-year basis, total oil stocks in OECD countries apparently kept on to demonstrate a strong positive dynamic due to a massive build of the stockpiles during spring months. To be more precise, total oil stocks in the OECD in September 2020 were 204.9 mln bbl, or +7.0% YoY, higher than they were one year ago in September 2019. According the preliminary IEA data, total OECD industry stocks fell in October 2020 by 55.3 mln bbl (1.78 mln bbl / d) to 3.13 bn bbl, and were 183.4 mln bbl above the five-year average. Observed global stocks fell by 4.1 mln bbl / d. The IEA suggests that the global crude market will have a stock surplus of 625 mln bbl at the start of 2021 versus December 2019. If one assumes that Chinese balances are neutral in 2021, the market will absorb the 183 mln bbl located elsewhere and in July it will move into deficit versus end-2019.

Total commercial inventories of crude oil in the USA during the month under review showed a certain increase relative to the volume of the prior month. The indicator went up on a monthly basis for the first time over last 5 months, although it can be attributed a seasonal pattern. To be more precise, total commercial inventories of crude oil in November 2020 rose by 3.6 mln bbl in contrast to October 2020, or +0.7% MoM. The volume of the stocks continued to remain elevated from a retrospective point of view. As of the end of November, the figure again was slightly higher than the upper bound of its 5-year range for this month of a year. The good news is that the current wave of the COVID-19 epidemic in the USA with a new spike of new daily cases beyond 200k had a limited impact on an economic activity in the country. So, the demand for crude oil in the USA continued to remain rather strong. The same time, crude oil stocks in the Cushing storage in Oklahoma (the basis for NYMEX WTI crude oil futures) contracted by 2.2% MoM, or -1.4 mln bbl relative to the volume of October 2020. Therefore, November became the 7th month in a row when crude oil stocks in the Cushing storage demonstrated an opposite monthly dynamic comparing to a performance of the overall crude oil inventories in the USA. It was the first month in recent 5 months when the stockpiles in Cushing showed a negative monthly dynamic, as in October the figure reached its highest print over a half of a year. Nevertheless, the volume of the stocks remained close to the upper bound of the range for this month of a year over last 5 years.

In November 2020, total crude oil stocks that held on floating storages around the world declined moderately by 19.3 mln bbl, or -14.4% MoM, and therefore continued to normalize for the 5th consecutive month after their rapid expansion during spring months and June 2020 as well. In absolute terms, the volume of crude oil stocks that held on floating storages globally decreased to 115 mln bbl. However, it is worthwhile to remind that in pre-COVID times a total volume of floating stocks of crude oil usually fluctuated in a range of 50-70 mln bbl that is roughly twice lower than the current level. That’s why a total volume of crude oil that held of floating storages in the month of November 2020 again was much higher than it was one year ago, in November 2019. To be more precise, floating stocks of crude oil in the world was higher by 67.6 mln bbl, or more than +140% YoY. From an annual dynamic standpoint, in November the stockpiles demonstrated an annual expansion during consequent 11 months.

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