Price movement recap
During the last 3 weeks, the oil price had first declined due to the lockdown announcements and political election uncertainties. Afterwards the oil price rebounded thanks to the Biden’s election (production in the US is expected to decrease + no more uncertainties on this election). Biden’s diplomacy is also a positive factor compared to Trump’s unpredictability. The optimistic outlook of 90% effective vaccines from Pfizer and 94.5% effective vaccines from Moderna allowe the market to rise, especially in the transport and energy (oil) sectors.
Futures prices / Cost Curves:
The Gulf Oil market is still in contango. Indeed, because of the Covid-19, supply remains higher than demand. However, if the vaccine developed by Pfizer and Biontech proves to be effective, we expect the price curve to flatten slightly in the coming months but still in contango. According to IEA (International Energy Agency), the Covid-19 vaccine is unlikely to raise oil prices until the end of 2021. A weaker demand outlook combined with rising supply is putting pressure on global producers to hold back output in order to support prices.
As explained above, the forecast for demand in the coming years is lower than it was at the beginning of the year. As shown in the chart below, this will necessarily impact the level of prices downward (supply > demand). We have used the Brent forward curve as there is not enough data on Dubai Crude. However, as the correlation between the different types of oil is very high, the scenario will be very similar for Gulf Oil.
Supply and demand dynamic
As we can see on graph 4, oil demand in the Middle East has not changed in the last 3 weeks. However, OPEC expects a decrease in demand for the end of 2020 and in 2021. Therefore, they will change their production plan as of January 2021. These changes are still due to Covid-19 and will last until mid-2021. Finally, we expect an upturn in demand thanks to optimistic forecasts of the Indian and Chinese economies.
Regarding the production, as shown in graph 5, it has slightly increased in September but is still very low compared to the same period in 2019. Finally, between the 30th November and 1st December OPEC members will meet the non-OPEC allies to discuss the production policy. The results of this meeting will also have an impact on price levels.
Recommendations
The market is still in contango and, from our point of view, will remain so for a long time. From an investment perspective, we still recommend to be long for the next 3 to 6 months. If the Covid-19 vaccine proves effective, this could have a significant impact on price level in the medium term with as the demand would pick up again, particularly in the field of transport and energy. Furthermore, we believe that the current price does not reflect the potential for recovery in the transport sector otherwise the price would have been higher.
Abbas Al-Azawi
Alexis Baeriswyl
Valery Sikorskiy
References
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