Crude oil demand on stronger trajectory, says MIDF Research
Crude oil demand is likely to be stronger in the second half (2H) of 2021 spurred by ongoing vaccination progress, according to MIDF Research.
Analyst Noor Athila Mohd Razali said the recent development on the global vaccination drive had returned some of the confidence into the market with businesses and consumer spending are expected to drive demand for crude oil and crude-related products.
“Due to the global vaccination drive coupled with the continued production cut, we expect crude oil to be in an undersupply position in the second quarter (Q2) and potentially in the third quarter (Q3) before reverting to an oversupply position in the fourth quarter (Q4) of 2021,” she said in a report today.
Supply is expected to rise by 1.6 million barrels per day (mbpd) in 2021, higher than demand, with crude demand to be driven by transportation and healthier petrochemical product prices.
The International Energy Agency (IEA) has projected demand to grow by 5.5 mbpd to 97.2 mbpd compared to 91.7 mbpd in 2020, although demand recovery has been rather sluggish in the past few months due to the persistent pandemic situation and movement restrictions.
Noor Athila said the Organisation of Petroleum Exporting Countries (OPEC) had expected demand to grow by 5.8 mbpd in 2021, primarily driven by the recovery in the transportation and petrochemical sectors.
“The recovery will largely come from gasoline demand for vehicles – which is expected to grow with the ease of movement restrictions in countries worldwide.
“Following suit is the demand for on-road diesel. Demand for industrial fuel, diesel and fuel oil are expected to return as well albeit at a slower pace as it remains highly dependent on the recovery in economic activities in 2021,” she said.
Although the overall demand remains highly dependent on the recovery of the aviation and transportation sectors – which makes up 50 per cent of the total world crude consumption, she said the improvement in petrochemical demand was expected to help close the demand gap.
This is following the strong offtake from the healthcare sector and feedstock supply recently experienced by petrochemical producers.
“Coupled with improving product spread (naphtha crack spread, gasoil crack spread etc) as a result of an increase in product prices, the better margin is also expected to drive demand for crude oil for the rest of 2021.”
She said OPEC and its alliance’s decision to not raise output through May 2021 will provide short term boost during the current recovery period.
The firm expects oil price to normalise to US$60 to US$65 per barrel from June following the return of supply into the market.
However, she said the increase in the supply of oil would be exacerbated by the return of oil production from countries that had had to curb productions due to internal/country-specific strife such as Libya.
She said oil majors worldwide would continue to withhold their exploration and production (E&P) capital expenditure (capex) spending at least until the end of first half of 2021.
This was despite the recent rally in oil price that resulted in Brent breaching the US$70 per barrel, a level last seen in 2019.
Previously, spending for the upstream E&P by oil majors consisting global integrated oils and independent E&P companies for 2020 had been slashed by up to 30 per cent in order to deliberately reduce production output and to assist in the recovery of the oil.
On the local front, MIDF Research expects Petroliam Nasional Bhd (Petronas) to remain cautious in its 2021 spending with lower capex and operational expenditure allocation should not be a surprise.
Petronas had planned to increase capex betweenRM40 billion and RM45 billion this year, still lower than the pre-pandemic level of RM50 billion to RM55 billion committed spending in capex annually.
“This in turn would also potentially mean lesser international E&P spending and more local-centric activities to reduce volatility in its expenses as well as; to support local oil and gas service providers.”
She said oil majors would not be in a rush to start drilling again as the increasing well efficiency is expected to effectively offset the decline in number of rigs and result in better output production.
“Therefore, we reiterate our view that supply will overtake demand in Q4 of 2021.”
MIDF Research remained positive for both upstream sub-segment and downstream sub-segment, backed by sustained recovery trajectory in both demand and product prices.
“We anticipate both sub-segments will benefit from the recent rally in oil price in terms of potential new contract awards following a more palatable oil price as well as; increase in product prices and spread for the downstream industry players.
“We also expect O&G players to register stronger year-over-year earnings growth in the financial year of 2021 after a series of commendable earnings recovery recorded from Q3 of 2020 onwards,” it said.
Source: New Straits Times