Saturday 4 July 2020


Oil to bounce back only in Q3 2021: MUFG

DUBAI, May 14, 2020

Global oil demand will not return back to pre-COVID-19 levels until Q3 2021, says MUFG’s Mena Research.
Leading indicators signal that global oil demand is recovering at an uneven pace. The nadir in COVID-19-led demand evisceration was in April at -26.1m b/d, according to MUFG’s models. 
A de-synchronised recovery is now underway as lockdown measures begin to ease. High frequency data indicates that oil consumption is improving in most key regions, and has almost recovered to 2019 levels in mainland China. 
First, Apple’s mobility trends statistics suggests driving activity is now recovering in the US, Europe and most of Asia, although many countries are coming off exceptionally low levels. Second, the latest weekly US EIA data supports this view, with gasoline demand seemingly having bottomed out in April. Third, flight tracking data is demonstrating that aviation activity is rebounding, albeit from a very low base.
Therefore, global oil demand will not return back to pre-COVID-19 levels until Q3 2021. Oil market fundamentals are set to become instantaneously balanced, with MUFG’s models pointing to the inflection point to be reached in late May – early June, with a deficit thereafter. 
Having said that, although signs of a recovery in physical oil markets are emerging and supply is responding, the fall-out from COVID-19 will be lasting. 
As the world emerges from lockdowns, a combination of weaker economic growth and lingering impacts of COVID-19 mobility restrictions will still be a drag on the recovery in oil demand, especially jet fuel. 
As such, MUFG forecasts the damage will persist into next year, with oil demand only reaching a pre-COVID-19 run-rate by Q3 2021.
Brent crude prices to average $43/b and $55/b in 2020 and 2021, respectively. Although there still remains high uncertainty on how oil demand and supply dynamics will play out in the coming weeks, months and indeed the rest of 2020, our expectation is that once oil markets reach the inflection point of the equilibrium of supply equating demand in late May – early June, with a deficit set to follow. 
It is at this point that MUFG believes that the oil price rally will take a firm hold, and continue to see upside risks to end Q2 2020 Brent and WTI forecasts of $32/b and $28/b, respectively. Thereafter, this sets the stage for structurally higher oil prices heading into H2 2020 with the current Brent price forecasts of $36/b and $46/b in Q3 and Q4 2020, respectively – with upside risks to these forecasts. 
Subsequently, as the deficit widens, this will be followed by a move higher in spot prices due to a steepening level of backwardation through H1 2021. 
Higher decline rates, lost shut-in capacity and a materially higher cost of capital for global oil markets will set the stage for lower supply and with it higher oil prices, with the structural outcome of the ongoing rebalancing leading our models to forecast Brent averaging $43/b and $55/b in 2020 and 2021, respectively. -- Tradearabia News Service


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