Commerzbank Commodities Radar January 2021

Source: Bloomberg data

Hitherto, the alliance has always been able to reach a compromise, time after time: most recently due to very significant concessions made by Saudi Arabia. Fine-tuning the supply level, however, remains a challenge. In view of the high Covid-19 infection figures in Europe and the USA, we think there will be a price drop in the first half of the year. Oil demand in industrialised nations is likely to disappoint once again in the first quarter as a result of continued mobility restrictions. Significant relief provided by vaccinations and seasonal factors is only likely to take effect in the second half of the year. To date, this weakness has been countered by very robust demand from China, but here too momentum is likely to slow.

For the time being, the situation can therefore be summed up as ongoing stuttering demand facing a significantly reduced oil supply. In the short term, supply will be around 8 million barrels less per day than before the crisis thanks to additional production cuts by Saudi Arabia. Furthermore, oil production in the US remains subdued. Whilst its ‘absolute’ low was probably reached in May 2020 at 10 million barrels per day – when production was cut quickly due to fears of excessive inventories – US production should reach its cyclical low in the spring of 2021 at just under 11 million barrels per day, i.e. approximately 2 million barrels per day less than during the peak at the end of December 2019.

In light of the additional reductions by Saudi Arabia, the oil market should be slightly undersupplied in the first quarter. At first sight, this situation seems constructive from a pricing point of view. However, OPEC+ is likely to significantly expand its oil supply as of April because Saudi Arabia will reverse its voluntary productions cuts again and the postponed production increases of February and March will be carried out subsequently. Hence, there is a risk of oversupply in the second quarter if demand does not pick up quickly enough. OPEC+ had actually intended to reduce inventories. Against this background, Brent Crude prices are likely to come under pressure once more during the first half of the year, falling to a level well below US$50 per barrel. This should also weigh on diesel prices even if the latter only benefited disproportionally from the recent price rally. The crack spread does not show its usual seasonal strength because weak demand for kerosene is putting a strain on the entire middle distillates segment. In the spring, diesel is therefore likely to fall once more to US$420 per ton, before climbing back towards US$500 in the wake of a crude oil price recovery and improving margins during the second half of the year.

Source: Commerzbank Research, as of: 12/01/2021

Source: Commerzbank Research, as of: 12/01/2021