The further supply cuts announced by Saudi Arabia at the start of 2021 have helped speed up the oil market’s rebalancing. The additional 1MMbbls/d of cuts from Saudi Arabia, with OPEC+ members (except Russia and Kazakhstan), are keeping their production levels intact. That has ensured that the market will resume drawing down inventories over the first quarter of 2021.
OPEC+ believes that OECD inventories will be back below the five-year average by June this year. Meanwhile, the IEA expects that OECD inventories at the end of December 2021 to be a little above 138MMbbls over the five-year average.
Moreover, the tighter market is also reflected in the forward curve for Brent and WTI, with both in deep backwardation. The prompt ICE Brent spread is trading in a backwardation of around $0.60/bbl. Meantime, it traded close to $4/bbl in April 2020.
In the second half of the year, we will witness a more healthy rebound
According to analysts, as coronavirus infections are falling and people are being vaccinated, we are likely to return to our normal life, which will support oil demand. They say that the demand recovery isn’t going to be a fast and short process. However, in the second half of the year, we will witness a more healthy rebound.
Additionally, analysts say that in 2021 oil demand is likely to increase by more than 6.5MMbbls/d. Meanwhile, in 2020, it declined by 10MMbbls/d. The second quarter of the year will be where we see the most robust year-on-year growth at around 14MMbbls/d. Moreover, they say they assume to finish 2021 with demand below 2019 levels. But, as we move through 2022, we should see a return to pre-pandemic levels.
We all had a bullish view of the oil market in 2021. However, Saudi Arabia’s additional supply cuts, increasing demand hopes, and boosting inflation expectation with the dollar weakness have meant that the market outlook is even more bullish than expected.
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