As the race between humans and virus gathers pace, the oil markets can only watch this tug-of-war between rapidly spreading COVID-19 and a patchy vaccine deployment playing out.
The world watched rather euphorically when governments began approving vaccines last month, but the persistent spread of the virus since has cast a shadow over the outlook for 2021, though most analysts are optimistic that humans will take the lead in this race in the second half of the year, if not earlier.
Despite COVID-19's recent resurgence in several countries, analysts expect a recovery in oil demand and prices this year.
S&P Global Platts Analytics has maintained its 2021 oil demand growth forecast at 6.3 million b/d over 2020, with recoveries occurring in all regions and across different products, though at varying levels.
"Overall, optimism on global economic growth outlook on the back of reasonably well developed and effective vaccines is the main driver of this demand forecast,” Kang Wu, Head of Global Demand, Risk and Asia Analytics at S&P Global Platts said in a recent note.
On January 11, Goldman Sachs said it sees Brent crude rising to $65/b by the middle of 2021, up to six months earlier than previously forecast. UBS has also raised its forecast for Brent crude to $60/b by mid-2021.
Underpinning this optimistic view is Saudi Arabia's surprising decision this month to unilaterally cut 1 million b/d of production from February, and a demand boost expected from the roll-out of the COVID-19 vaccines.
"Despite the [demand-side] risks, we believe Saudi and OPEC+ actions have put a new price floor of $50/b for 2021. As a result, we believe a modest upward revision to our price outlook is justified for Q1 2021,” Chris Midgley, Global Director of Analytics, S&P Global Platts, said.
Platts Analytics sees Dated Brent prices to be in low to mid $50/b for much of 2021, with stronger support in the second half of the year.
Asia lockdowns and demand recovery
Oil demand outlooks may not have been revised but downside risks are rising following a second wave of lockdowns seen across Asia and particularly in China, which is widely seen as leading the recovery.
Japan expanded its state of emergency this month, mirroring a similar increase in restrictions across Asia recently as COVID-19 cases rise, threatening to derail regional demand-side recovery. Malaysia declared a state of emergency Jan. 12, a day after Indonesia, Southeast Asia's largest buyer of gasoline, started another two-week lockdown in the country's most-populated island of Java.
China, which had managed to successfully curb the spread of the virus, has witnessed a resurgence in cases, which is dampening demand for transportation fuels. The country on Jan. 17 registered 109 new COVID-19 cases, the sixth continuous day to have more than 100 cases.
To prevent the spread, several cities and towns in the northern part of China have been locked down in January. Even in the low-risk regions in the south, the government has called for citizens to stay locally during the coming Chinese New Year holidays, when transportation fuel demand generally picks up.
India's economy, meanwhile, seems to be back on track and oil demand has been growing for four straight months despite the country having the second largest number of cases in the world. Mobility is on a firm upward trend and vehicle sales are soaring, all pointing to strong transport fuels demand growth.
India's driving activity in December was at 145% against pre-COVID levels, up from 125% in November, with early January showing further uptrend.
Supply side twist
As the demand recovery hobbles on, the supply side took on a curious twist this month with Saudi Arabia's surprising unilateral production cut announcement, which Russian Deputy Prime Minister Alexander Novak called the kingdom's "New Year's gift” to the oil market.
The cut accounts for about 10% of Saudi Arabia's current output and comes even as four-year oil ally Russia, the least compliant OPEC+ member, lobbied for and won an increase in its production quota.
Saudi Energy Minister Prince Abdulaziz bin Salman said Jan. 5 that the cut will bring down oil inventories and support "our economy, the economies of our friends and OPEC+ countries, and for the betterment of the industry at all levels."
While the unilaterality of the decision has taken analysts by surprise, Saudi Arabia seems to have at least scored a diplomatic coup with Russia after relations were strained due to differences in opinion around output policy.
The foreign ministers of the two countries recently held a joint press conference where they talked about the importance of their cooperation in contributing to the stabilization of energy markets.
"We value the cooperation we have with our partners within OPEC+, on top of them Russia, and we look forward to continued cooperation," Saudi Arabia's foreign minister Faisal bin Farhan said.