Renewed European lockdowns will delay demand recovery in the global oil market, particularly if these measures are extended into 2021 or further restrictions are re-introduced in the US or other regions, Fitch Ratings says. However, OPEC+ supply adjustments should mitigate the impact of demand volatility on oil prices. We expect global demand to be stronger during the current lockdowns than in April-May and have kept our oil price assumptions unchanged.
In September and October oil consumption was about 5% lower than before the coronavirus pandemic, although this was a dramatic improvement compared to April, when demand was about 20% lower yoy. European lockdowns, even if extended, should not result in a massive fall in demand as Europe accounts for just about 15% of global oil consumption. Furthermore, the current lockdowns are less strict, which means demand for vehicle fuel will be less affected. However, we expect a combination of the lockdowns and rising infection rates across the world to delay a full demand recovery beyond 2021.
Under the original OPEC+ deal reached in April, members would increase production by about 2 million barrels per day (MMBpd) from January 2021. However, we expect that OPEC+ is likely to at least extend the cuts by several months in order to avoid production surpluses and rapidly falling prices. Saudi Arabia and Russia have already indicated that they are considering extending the existing production cuts by three months or making even larger cuts. We believe that OPEC+ will continue to make timely changes to supply in 2021, which should reduce oil price volatility. The next OPEC+ meeting is scheduled for 30 November and 1 December.
We estimate that even if demand remains at the current levels of about 95MMbpd throughout 2021, OPEC+ should be able to keep the market broadly balanced by maintaining its production. Any decisions to increase production could result in oversupply and reverse the progress achieved in oil inventory normalisation.
Growing production in Libya, which is a member of OPEC but is exempt from production cuts alongside Iran and Venezuela, is another factor that makes a cuts extension more likely. Libya increased production from almost zero to 0.5MMbpd in October, and is planning to ramp up its output to 1MMbpd.
US shale production remains an important market driver. It is currently about 2.5MMbpd below the pre-crisis level, and we do not expect it to fully recover in the medium term, although better-positioned companies may start to increase output. Many US shale-focused companies went through bankruptcy and the industry is consolidating, which should make it more resilient to oil price shocks. However, constrained access to funding for high-yield issuers and producers focusing on breakeven price reduction may constrain further growth. However, the number of oil drilling rigs bottomed out in June-July, which suggests that the worst could be over for the US shale industry.
We rate through the cycle and the renewed market volatility should not have a material negative impact on our oil and gas ratings portfolio. We maintain our assumptions for Brent averaging USD45/bbl in 2021, USD50/bbl in 2022 and USD53/bbl in the long term. However, lower-rated companies with liquidity issues will be more vulnerable if volatility persists.
Source: Hellenic Shipping News