Against all odds, the recovery in global oil demand is underway

Against all odds, the recovery in global oil demand is underway

Global markets continue to grapple with uncertainties surrounding the latest variant of the coronavirus and, more specifically, whether the mutation poses a new material threat to economic recovery. We can’t help but remember the almost identical drama that surrounded the discovery of the Delta variant a year ago. Despite the flood of headlines and reporting on this tension, we saw notable gains during the year in global demand for oil.

Our recent analyzes indicate that global oil consumption is still in recovery mode. If we start with a reduced focus ring, the demand for oil in the United States has exceeded the respective rates of 2019 – a development that was not expected until 2022. The United States accounts for about a fifth of global consumption, and its use was the hardest hit in 2020 by pandemic-related measures.

By expanding the target, global air traffic is still close to 2019 levels, a finding that deserves attention. In March 2019, we saw flight activity plummet within weeks when pandemic containment measures took effect. Meanwhile, recent data for China suggests that its demand for oil picked up in November. Finally, and perhaps most importantly, our exclusive analysis of global stocks suggests that oil consumption strengthened last month after what appeared to be a hiatus in October.

Despite the efforts of many, there is no doubt about the success of OPEC + in reducing global oil stocks. The surplus accumulated in the spring of last year as a result of the collapse in global oil demand has been eliminated and storage has been further reduced to the 2010-2014 average, which we believe is the target. de facto of OPEC +.

In terms of determining the current “fair value” of oil, we return to our inventory analysis. In this regard, we believe that the main measure of global stocks was a much larger than normal draw in November. While there are many moving parts in an oil balance model, all of these supply and demand variables overlap at the storage level. As a result, changes in inventories in storage levels show a strong relationship with changes in oil prices, as would be expected. A proprietary model we have developed and maintained, and recently updated to reflect our end-November stockpile figure, places the current “fair value” of Brent crude (the global benchmark) north of $ 90 per barrel.

In the very near term, the market will have to digest the first tranche of sales of US emergency stocks – 18 million barrels are expected to be auctioned by the end of this week. Historically, we have found that when emergency oil stocks are sold for non-emergency reasons, the price of crude actually goes up until release. Given that current oil prices are well below their “fair value”, we would expect the release of US strategic oil reserves to likely cause the same price reaction.

• Michael Rothman is the President and Founder of Cornerstone Analytics, a US-based consulting firm focused on macroenergetics research. He has nearly 40 years of experience covering global energy markets and has participated in OPEC meetings since 1986. He is also the author of “Cornerstones of Life”, available on Amazon.

Disclaimer: The opinions expressed by the authors of this section are their own and do not necessarily reflect the views of Arab News

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Felix J. Dixon