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Vaccine Hopes Fail to Spark Revival in Oil Demand Forecasts

Vaccine Hopes Fail to Spark Revival in Oil Demand Forecasts

You’d think that the euphoria around the announcement of a big step toward a vaccine against the coronavirus that has run riot this year would brighten the outlook for oil. Not so fast.

The International Energy Agency, the Organization of Petroleum Exporting Countries and the U.S. Energy Information Administration have all published new outlooks since Monday’s announcement from American drugmaker Pfizer Inc. and German biotechnology firm BioNTech SE. But as yet there hasn’t been any big, upward revision to oil demand forecasts in the wake of the news. In fact, just the opposite.

Short-term headwinds for oil demand continue to outweigh any positive signals from the vaccine test results, with oil producers left facing a difficult few months until the middle of next year and an uncertain recovery after that. 

In the short term, it’s demand destruction, rather than recovery, that’s dominating forecasts. All three of the major agencies have cut their global oil demand outlooks for the current quarter and the first half of 2021, as case numbers soar in Europe and the U.S., leading to further restrictions on movement and economic activity. 

Vaccine Hopes Fail to Spark Revival in Oil Demand Forecasts

The Europe-based agencies (the IEA and OPEC) are much more pessimistic about the impact of these curbs on oil demand, slashing consumption estimates for 4Q20 by about 1.2 million barrels a day compared with what they foresaw last month. The EIA has made a much more modest cut of just 300,000 barrels a day.

All three agree that there will be little respite over the colder winter months in the Northern Hemisphere, with demand expectations also cut for the first half of 2021. Here the outlooks are much more closely aligned, with all three cutting their forecasts by close to 500,000 barrels a day. The IEA warned that “vaccines are unlikely to significantly boost demand until well into next year.”

Even then, the impact is far from certain. The outlooks for the second half of 2021 are varied, with only the IEA increasing its demand assessments for both the third and fourth quarters. That may reflect the fact that it was the last to publish its November report, allowing it a little more time to assess the potential implications of the step toward a vaccine; the EIA report was published just a day after the announcement.

Small downward revisions to non-OPEC supply projections since last month do little to offset the loss of demand, leaving the oil producers in the OPEC+ group of countries facing a deteriorating outlook on the world’s demand for their crude over the coming months.

OPEC and the IEA have taken an axe to their forecasts of the so-called “call on OPEC crude” — the difference between global oil demand and non-OPEC supply — over this quarter and the first half of 2021. Both have cut their assessment of the world’s need for the group’s crude by about 700,000 barrels a day from where they saw it a month ago. The EIA sees a much smaller drop, based on its more upbeat assessment of demand during the current quarter.

Vaccine Hopes Fail to Spark Revival in Oil Demand Forecasts

Another issue for the producer group is the rapid return of Libyan oil production, which is coming at an inconvenient moment for the rest of the group and at a much quicker pace than initially anticipated. The North African country’s production rose to 454,000 barrels a day in October, according to the six secondary sources used by OPEC to monitor its members’ production, up from 155,000 barrels in September. It’s on course to top 1 million barrels a day on average this month and the country hopes to reach 1.3 million barrels a day by the end of the year.

That additional Libyan supply had not been factored into the calculations made by the OPEC+ group — which links the OPEC countries with a group of external allies — when it decided back in April that it would be able to ease its record output cuts for a second time at the end of the year.

As the group’s output agreement, from which Libya is exempt, currently stands, the producers are scheduled to add another 1.9 million barrels a day to global supply from the beginning of 2021. It was already looking doubtful whether they would be able to do so without undermining prices. The latest outlooks from the world’s big three forecasting agencies make it very probable that they will have to extend the current level of cuts when they meet in less than three weeks’ time.

©2020 Bloomberg L.P.