Note from BofA Equity Research - Sept 16

[dan_s]

OPEC projects 2022 demand exceeds pre-pandemic levels

Brent’s recent break above $75 marks the highest since early August. While news
remains sparse, leaving technical indicators to have outsized influence and which we
expect defines today’s rally, the outlook for supply/demand comes back into focus as
we’ve officially crested out of the seasonal peak for consumption. The outlook for winter
compares with two still unpredictable trends – pacing of return to work and the rise of
COVID cases/mobility constraints – which remain the largest structural factors to define
the drawdown on balances and the next moves of OPEC+ that has flagged confidence in
planned step ups. That said, OPEC’s latest projections on the market suggest a rosy
outlook for 2022 with demand that will exceed pre-pandemic levels and which marks an
idiosyncratic call vs the IEA and EIA that project a more protracted recovery as of now.
While we understand this sentiment fed into the JTC data that guided the quick decision
to step up October output, our base case remains that OPEC+ remains responsive to
market movements and that incremental step ups through year-end are not guaranteed.

In other words, OPEC+ will do whatever it takes to sustain oil prices near the current level.

OPEC’s outlook is as much an economic view as it is an oil call. The group cites the
robust correlation between surging economic growth and oil demand in 1H21 and sees
this trend continuing in 2022, albeit with some deceleration in 2H21 due to COVID
impacts. In its latest forecast, total demand growth improves 4.3% in 2022 yoy and
largely balanced between OECD and non-OECD though with the strongest overall
improvements in India an SE Asia. All this said, we do not take OPEC’s report as any
projection of its forward thinking on adding incremental supply; our base case, anchored
on what is now a series of opportunistic pivots over the last 18 months is that OPEC+
remains committed to stabilization. August output notably fell short of the initial step up
plan while we note that its latest Oil Market Report ‘Feature Article’ closes with the
following:

Nevertheless, numerous uncertainties, including the continued COVID-19 impact on the
global economic recovery, will require continued coordinated policies, including the
commendable efforts undertaken by OPEC and non-OPEC oil producers participating in the
Declaration of Cooperation (DoC), to ensure stability and balance for the global oil market.

On Wednesday, both Brent and WTI are up 3-4% with the equities in tow. Given a relatively
benign DOE report and outperformance that accompanied the open, we once again
consider technicals as a primary driver – recall our technical analyst Paul Ciana, had
highlighted a bullish engulfing pattern emerging at the end of august that historically
has projected outperformance on a 1-2 month timeline.