Oil market optimism risks derailing its own recovery, with the recent rise in crude prices above $50/b possibly harming demand and incentivizing additional supply.
Hopes that vaccines will revive the global economy, coupled with the OPEC+ decision to delay bringing back much of the extra 2 million b/d of oil planned for January, are supporting prices.
Demand in key hubs India and China have also given the bulls something to latch on to. India appeared to turn the corner in October, with oil products demand up 2.5% year on year, ending seven straight months of decline.
And China has been carrying the world's oil consumption in recent months, with crude imports in November bouncing back from a six-month low the previous month.
Dollar weakness has been a contributing factor, too, given a barrel of oil is priced in the US currency.
Dated Brent, the physical benchmark used to price two-thirds of the world's oil, has risen more than 20% over the past month.
But the new normal is still some way off, and the oil market may be getting ahead of itself.
Better, but still bad
COVID-19 infections remain at peak levels globally, decimating demand for transport fuels, the mainstay of oil use. European and US mobility trends remain weak, suppressing the appetite for gasoline and diesel, while jet fuel is still so unwanted refiners are turning it into shipping fuel. A warmer winter in the Northern hemisphere is likely to blunt demand for heating oil, too.
Onshore storage is still a work in progress, with commercial crude and oil product stocks across the US, Europe and Japan still at higher levels than at the same point in any of the previous five years, according to S&P Global Platts Analytics.
Global stocks have continued to draw and are now at roughly half of their peak level but are still 450 million barrels higher than at the start of the year.
Platts Analytics predicts oil demand growth of 6.3 million b/d in 2021 from a contraction of 8.7 million b/d this year, with jet fuel the main reason oil demand will still fall well short of 2019 levels next year.
Indeed, the global economic recovery is still a key risk, especially given S&P Global Ratings recently noting that global debt will reach $200 trillion by the end of the year, with much reliance on fiscal stimulus packages to reboot pandemic-hit economies.
Own worst enemy
The rise in oil prices may undermine the fragile rebound.
Refineries, which have suffered from dreadful returns, have been reducing operations: cutting runs, idling plants, going into maintenance and even converting to bio-refinery alternatives.
Shell, BP, Total, Marathon and Phillips 66 are among the high-profile names to close refineries. While that is certainly helping to ease the glut in oil products, there is likely to be more to come, especially in Europe, lured by greener energy transition pastures.
But with new refining capacity due on from the Middle East and Asia, and refineries elsewhere lying dormant waiting for improved margins, a flood of new products may suffocate the resuscitation in demand. China alone is expected to add 440,000 b/d of new capacity in 2021, in addition to the 260,000 b/d coming online this year, Platts figures show.
OPEC+ output to grow
The same gauntlet is being laid down to OPEC+.
The alliance of Saudi Arabia, Russia and others this month agreed to supply an additional 500,000 b/d in January, instead of the 1.9 million b/d scheduled increase. The group plans to tweak the crude production quotas monthly, so as to not overwhelm the market, but keeping such restraint amid higher prices and patchy compliance histories of certain producers could prove tricky.
The sutures in the patched-up deal can't be hidden. The disparate oil producers have different budgetary needs and varied oil agendas, leading to a mooted rollover of the 7.7 million b/d production cut being shelved and a 7.2 million b/d deal being the compromise.
Saudi Aramco, the kingdom's oil behemoth, has now raised all pricing of its crude exports for January to its key Asian buyers and the scramble by OPEC+ to take advantage of higher prices could be its own undoing.
At $50/b, US production also returns to OPEC's radar. The coronavirus effects that hurt shale have driven down the pre-barrel costs of production, which will help the sector eventually get back on its feet. Like OPEC, shale tends to get written off by many analysts only for it to surprise once again.
Platts Analytics sees oil prices hitting $50/b in the latter half of 2021 once again after a lull. Increases in demand are likely to be quickly plugged by OPEC+ barrels eager to take advantage of the hard work done in 2020.
Even market participants are not wholly convinced the rally has much further to run just yet. A look at the Brent market structure shows a flat forward curve in 2021, even with all the euphoria around a vaccine boding well for increased consumption later next year.
Those looking at the oil market's run higher may do well to remember that this recovery looks more like a marathon than a sprint.
Fuel for Thought is a weekly column published first in S&P Global Platts Oilgram News