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OPEC tackles the split in seismic demand as the cartel plans its next move
(Bloomberg) – As OPEC + ministers meet virtually this week, the city that traditionally hosts their meetings will be blocked. The Christmas markets in Vienna will be closed, the famous Ringstrasse silent. For oil ministers, the scene should call for caution, but while the Austrian capital provides a dramatic example of how the second wave of the pandemic is shutting down economies in Europe and the United States, the global picture is more nuanced. almost the opposite of that of Vienna. The streets in India were full during the recent Diwali celebration; The Golden Week holidays in China saw millions of people take cars, trains, and even planes to visit relatives across the country.The east-west divide is yet another conundrum for OPEC +, which on Monday and Tuesday must decide whether to delay an increase in production scheduled for January – – and if so, for how long. Informal talks on Sunday failed to reach an agreement. In addition to geographic division, there is another crucial division in the global oil market: while demand for gasoline and diesel has returned to around 90% of their normal level, jet fuel consumption languishes at around 50%. “The magnitude of the shock and the irregularity of its impacts imply a recovery process that is far from smooth,” said Bassam Fattouh, head of the Oxford Institute for Energy Studies. Privately, OPEC + delegates talk about the imbalance in recovery, both geographically and between refined products. More and more often there is talk of another segmentation: the quality of crude oil. The market for denser, more sulphurous crude, called heavy-sour, is tight, mainly due to production cuts by Saudi Arabia, Russia and other large producers. But the so-called light sweet market is saturated, in part because Libyan barrels are back on the market after a ceasefire and European refineries consume less crude than the North Sea, all of which complicate the deliberations of OPEC + ministers. And they have only one blunt tool at their disposal: increase or decrease overall production. OPEC + nations do not aim for the production of gasoline or jet fuel, but only crude oil, but there is also a geographical handicap: most of their oil goes to Asia, where demand is strong, rather than to Europe and America, where it is weakest. This means they can do little to address overeating where it matters. Quality is also an issue: OPEC mainly pumps highly acidic crude and can do relatively little to cut the excess of slightly sweet crude. There is some consolation. While the recovery in oil demand that began in May faltered in October and November as the second wave took hold, it wasn’t the same hit on the market as it was earlier this year. Blockages in Europe are not as bad as the first wave and demand in Asia is increasing, not only in China, but also in India, Japan and South Korea. High-frequency data for road use shows a decline in early November by about 30% from pre-Covid levels, compared to nearly 70% in late March and early April, according to an index compiled by Bloomberg News. The most recent data suggests that street fuel demand bottomed out around November 15 and has been picking up since then. With European nations easing lockdowns in the run-up to Christmas, demand is likely to pick up further and, put together, this means the market is not as bad as it seemed just a few weeks ago. Oil prices are reflecting the more positive tone: Brent crude rose well above $ 45 a barrel and the shape of the curve turned upside down, with neighboring contracts trading at a premium for subsequent ones. That dynamic, known as backwardation and traditionally a bullish sign, means that demand is going above supply. The physical market, where actual barrels change hands, is also showing signs of strength: the crude varieties preferred by Chinese refineries are commanding rising premiums. Take Russia’s ESPO crude, a grade that China’s independent refineries, known as teapots, love to buy. In the most recent auctions, it changed hands at $ 2.85 a barrel above its benchmark, up from 55 cents in mid-October. Beyond the next quarter, the outlook is further improving, with many already confident about the impact of viral vaccines on oil demand. If they’re right, by the middle of the year, when OPEC is likely to meet again, the streets of Vienna will again be filled with tourists, often perplexed to see oil ministers being followed by packs of cameras across the capital. Austrian. The cartel is tentatively planning to hold its biennial international petroleum seminar, a two-day industry festival, at the Hofburg Imperial Palace in June 2021. “The efficacy and availability of vaccines indicates a fairly broad recovery in oil demand. next year. to allow OPEC to achieve both a rebalancing of excess inventory and a sharp increase in production, “said Damien Courvalin, oil analyst at Goldman Sachs Group Inc. For now, however, OPEC + still has some work to do. If the cartel is to continue draining inventory accumulated earlier this year, it must keep the market in deficit rather than simply balancing supply and demand. With Libyan production resuming, OPEC economists themselves believe that global inventories would increase by about 200,000 barrels per day during the first quarter of 2021 if the group increased production as expected in January. If he delays the increase by three months, inventories would run out by around 1.7 million barrels per day between January and March, a similar amount to what was expected in the fourth quarter of 2020. “The job is far from done “said Gordon Gray, Global Head of Oil and Gas Equity Research at HSBC Holdings Plc. (Adds interview result) For more articles like this, visit bloomberg.com Sign up now to stay on top of the most trusted business news source. © 2020 Bloomberg LP
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