Energy Prospectus

US RESEARCH PUBLISHED BY RAYMOND JAMES & ASSOCIATES
as of October 5, 2020
Energy Stat: Near-Term Headwinds for Oil; After That, Expect a Strong Bounce in 2H21

It is not often that we consult the World Health Organization website before writing about oil prices, but this is one of those times. COVID metrics remain problematic in much of the world - and it is still only early October. More regional and city-level "lockdowns 2.0" this winter in the Northern Hemisphere are inevitable - it is only a question of where, and for how long - thus creating near-term headwinds for oil demand. On the bright side, by mid-2021 there should be vaccine availability on a large scale. While the demand side of the equation is largely a matter of tracking COVID data these days, supply is driven by more "standard" variables: OPEC is showing discipline, compounding the non-OPEC organic field declines.

At futures strip pricing, we forecast hefty global inventory draws in both 2021 and 2022. The industry will ultimately need pricing much higher than the current strip. After broadly flattish prices in 4Q20 and 1Q21, reflecting the aforementioned near-term headwinds, we maintain our forecast for a 2021 exit rate of $70 WTI, equating to a full-year 2021 average of $55, which is ~30% above the strip.
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Oil Demand Forecast:

Note from Raymond James Energy Sector Team in Houston:

As it relates to transportation and thus oil demand, traffic congestion is an essential metric to track. This tells us what people are actually doing, rather than what they are legally permitted to do. The pace of traffic recovery since the start of reopening in April has varied a great deal between the world's regions. Europe has had the most robust improvement overall, in the sense of returning the closest to the historical average (preCOVID) levels of traffic. However, Europe is currently front-and-center for worsening COVID metrics, with countries as varied as the U.K., Ukraine, Netherlands, and Hungary setting records for daily case count increases in recent weeks (see page 63 here). It is no longer just a problem for countries around the Mediterranean – such as Spain, Greece, and Croatia – where the second wave had originated in July, largely spread by tourism venues. In this context, cities such as Madrid and Dublin, and much of the U.K., have seen the return of lockdown-type measures. On the whole, traffic in the U.S. is somewhat weaker than in Europe, and with a great deal of variability from city to city. Traffic is the weakest in the hardest-hit emerging markets, with the Americas ex-U.S. category, on the whole, doing a bit better than Asia. Major contributors to the current worldwide total of approximately 200 million people living under lockdowns are large parts of Argentina (45 million); large parts of California (40 million); Venezuela (29 million); large parts of Chile (19 million); Jakarta, Indonesia (10 million); and Israel (9 million). To clarify, this does not include relatively minor, narrowly targeted restrictions such as curfews or bar closures.

For understandable reasons, the IEA this year has been delayed in reporting quarterly oil demand actuals, which always represents the baseline for our forecasting. At this point, 2Q20 actuals are not yet available, which makes it impossible for us to get overly granular. That said, we are modeling 4Q20 demand down 800,000 bpd versus 3Q20, with 1Q21 essentially flat with 4Q20. This reflects our view that the pandemic's wintertime worsening will lead to an increase in regional (state/provincial) and city-level lockdowns across the Northern Hemisphere, though a return to national lockdowns (as had been the case in March/April) should be rare.

With the markets and the public placing great hopes on speedy development and distribution of vaccines, our biotech colleague Steve Seedhouse envisions that large-scale availability for the general population in major economies will materialize in the spring and summer of 2021, too late to help in the winter. Medical workers and high-risk population groups - approximately 10-20% of the population - will be prioritized in the initial stage of vaccine allocation, but even some portions of these groups will likely need to wait until after the winter, due to inevitable delays in logistics. With COVID compounding the customary wintertime stress in the healthcare system, lockdowns would serve the purpose not only of reducing transmission but also preventing healthcare system breakdowns.

Putting everything together, our estimate of COVID demand impact is 9.2 million bpd in 2020 and half that level in 2021. To clarify, the 2021 demand growth forecast shown in the table below, 5.5 million bpd, represents the sum of post-crisis recovery (4.6 million) plus assumed "normal" annual demand uplift (1.0 million). The forecasted demand growth in 2022 assumes, broadly speaking, demand returning to pre-COVID levels. This does not mean that every fuel category will be back to where it was in 2019. For example, full recovery of aviation is unlikely until 2023 at the earliest. On the other hand, road transport in 2022 may actually be higher versus 2019.