OPEC+ has decided to prune output cuts and Saudi Arabia its additional output cut of 1m b/d and ramp up by 2.15m b/d during May-Jul’21. IEA estimates global demand to rise by 5.8m b/d in Q4CY21E from Q1 levels, supply by 4.2m b/d during the same period and supply deficit to be at 0.7-2.8m b/d in Q1-Q4CY21E. Surge in covid cases in Europe and India may mean lower global demand and US lifting sanctions on Iran may mean supply is higher than estimated. However, we expect OPEC+ to deepen cuts, if required, to ensure supply deficit until demand recovers and to make up for any rise in supply from Iran. Risks to demand and of rise in supply would keep Brent below US$70/bbl, but OPEC+ capping supply would ensure it is over US$60/bbl. Brent above US$60/bbl augurs well for OIL and GAIL
* Demand hit by covid surge: IEA’s global oil demand estimate in Apr’21 for Q4CY20- Q2CY21E are 2.0-0.3m b/d lower than at peak. Surge in covid meant decline in petrol demand by 30-26% YoY and diesel by 19-13% YoY in Jan-Feb’21 in six European economies (Europe-6). Europe-3 diesel and petrol demand is up YoY in Mar’21 on a low base, but down 6-17% YoY over Mar’19. Petrol demand in UK was down 44-37% YoY in Jan-Feb’21 while petrol demand was down 26-28% YoY and diesel down 32- 17% YoY in Germany in Jan-Feb’21. Second wave in India may also hurt demand, but in 1-21 Apr’21 petrol demand is 2.1% higher and diesel 3.9% lower than in 1-21 Apr’19. IEA’s demand estimate for Q4CY21 is at a new high of 99.5m b/d; over 1.08bn doses of vaccines rolled out globally and infections subsiding in UK, Israel and US, where high proportion of population has been vaccinated, is probably driver of this estimate.
* OPEC+ set to boost supply by 2.15m b/d during May-Jul’21: OPEC+ on 1-Apr’21 decided: 1) OPEC+ output would be raised by 350k b/d each in May-Jun’21 and 450k b/d in Jul’21, and 2) Saudi Arabia would prune its 1m b/d additional voluntary output cut by 250k b/d in May’21, 350k b/d in Jun’21 and 400k b/d in Jul’21. We estimate OPEC+ output cuts at 8.2m b/d in Apr and at 7.6-6.05m b/d in May-Jul’21 vs 5.8m b/d in CY21 as per Apr’20 deal. OPEC+ delayed pruning of output cuts as second wave of covid hit US and European demand. OPEC+ capping supply kept oil price high.
* Supply deficit at 0.7-2.8m b/d in Q1-Q4CY21E: OPEC+ capping supply ensured supply deficit at 1.2m b/d in Q1CY21. Despite OPEC+ ramping up output gradually from May’21, supply deficit is estimated at 0.7m b/d in Q2CY21E and 1.7-2.8m b/d in Q3-Q4CY21E. Surge in covid cases in Europe and India may hurt demand recovery. US lifting sanctions on Iran oil exports, which may happen as early as in mid-May’21, may boost supply. However, we expect OPEC+ to deepen output cuts, if required, to ensure supply deficit, which should keep Brent over US$60/bbl.
* US output to rise to 11.4m b/d by Dec’21 and 12.3m b/d by Dec’22: US oil output is up to 11.08m b/d in Jan’21 from low of 10.02m b/d in May’20. US shale output at 6.95m b/d in Feb’21 was up 780k b/d from low of 6.17m b/d in Apr’20. US oil onshore rig count, a lead indicator, which was up by 171 (99%) from lows in mid-Aug, is set to drive US output to 11.43m b/d in Dec’21 and 12.27m b/d in Dec’22 as per EIA.
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