Price movement recap
From the beginning of November, we have seen a sharp increase in the oil price: the performance is up by 30% on the WTI. The major reason behind this is the positive prediction regarding the vaccines of Pfizer and Moderna. The additional rebound was generated after the decision of the OPEC+ meeting. A consensus on the reduction of the production quotas for 2021 was agreed. Additional 500’000 barrels will arrive on the market every day, which is much less than the initially 1.9 million barrels planned.
WTI spot price:
Futures prices / Cost Curves:
It is interesting to note that the Curves of oil (orange curve) is no longer in contango but in backwardation as of June 2021. It means that traders/market think that the demand will be slightly higher than the supply from June. However, traders do not have a very precise opinion on the curve with both backwardation and contango. Moreover, with a relatively flat slope, it is difficult to affirm with certainty whether is it the supply or the demand that is higher than the other. It is more of a “wait and see” situation.
It’s also interesting to compare the actual future curve (orange) with the curve from a month ago (green). The market was clearly in contango: supply higher than the demand. The situation has evolved a lot since then.
Supply and demand dynamic
The OPEC and non-OPEC Ministerial Meetings, which were due to take place from 30 November to 1 December, finally took place on 3 December. During this event, they went back on their decisions of 6 June 2020, which consisted of reducing production to an average of 9 mb/d in 2020. The conclusion was that everyone followed the rules.
As for the future, they decided to reduce their production by 0.5 mb/d, from 7.7 mb/d to 7.2 mb/d, by January 2021. In addition, it was decided that there would be a monthly meeting to make adjustments if necessary.
We also think that the Biden’s global energy policy has an impact on the global supply and demand dynamic. Indeed, the climate change is at the center of his energy policy. Biden wants to considerably reduce the energy-related emissions, 15% of which are produced by USA. He is also determined to rally rest of the world in follow this movement. If this scenario becomes real, the demand for oil may decrease in the medium term.
Recommendations
From an investment point of view, and based on the above, we recommend being long for the next 3 months. As explained, the optimistic forecasts for the vaccine could significantly increase demand, which could generate a backwardation. Moreover, the OPEC+’s decision on the reduction of oil production for 2021 could reinforce this trend. The situation will need to be analyzed around April 2021, as the slope of the forward curve is relatively flat, and the market could swing back and forth.
Abbas Al-Azawi
Alexis Baeriswyl
Valery Sikorskiy
References
MCCORMICK, Myles and BROWER, Derek, 2020. Biden’s climate agenda goes global. [online]. 3 December 2020. [Viewed 9 December 2020]. Available from: https://www.ft.com/content/b2d315c6-876a-4d95-8c8f-0df4b86ee532
OPEC : The 11th OPEC and non-OPEC Ministerial Meeting concludes, [no date]. [online]. [Viewed 8 December 2020]. Available from: https://www.opec.org/opec_web/en/press_room/5966.htm
OPEC : The 12th OPEC and non-OPEC Ministerial Meeting concludes, [no date]. [online]. [Viewed 9 December 2020]. Available from: https://www.opec.org/opec_web/en/press_room/6257.htm
BOURSE, Zone, [no date]. PÉTROLE BRENT (LONDON BRENT OIL) : Graphique de Cours Comparatif | XBNT | XX00000BRENT | Zone bourse. [online]. [Viewed 8 December 2020]. Available from: https://www.zonebourse.com/cours/matiere-premiere/LONDON-BRENT-OIL-4948/graphiques-comparatif/
https://www.cmegroup.com/content/cmegroup/en/trading/energy/crude-oil/dubai-crude-oilcalendar-swap-futures.html Le pétrole récupère au lendemain d’une forte chute, 2020. Allnews [online]. [Viewed 8 December 2020]. Available from: https://www.allnews.ch/content/march%C3%A9s/le-p%C3%A9trole-r%C3%A9cup%C3%A8re-aulendemain-d%E2%80%99une-forte-chute
Petroleum, [no date]. [online]. [Viewed 9 December 2020]. Available from: https://www.eia.gov/petroleum/weekly/