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Global markets continue to wrestle with uncertainties surrounding the latest coronavirus variant and, more specifically, whether the mutation poses a new material threat to economic recovery. We cannot help but be reminded of the nearly identical drama that surrounded the discovery of the delta variant a year ago. Despite the flood of headlines and reporting about that strain, we saw notable gains during the year in world oil demand.
Our recent analyses indicate global petroleum consumption is still in the recovery mode. If we start with a narrowed-down focus ring, US oil demand has been running above respective 2019 rates — a development that was not expected until sometime in 2022. The US accounts for about one-fifth of global consumption, and its usage was the hardest hit in 2020 from pandemic-related measures.
Broadening the lens, global airline traffic is still running near 2019 levels, a finding that merits attention. In March 2019, we saw flight activity collapse in a matter of weeks when pandemic containment steps came into effect. Separately, recent data for China suggest its oil demand picked up in November. Lastly, and perhaps most importantly, our proprietary analysis of global inventories suggests oil consumption gained additional footing last month after what appeared to be a pause in October.
Despite the efforts of many, there has been no room for doubt about the success of OPEC+ in working down global oil inventories. The excess built up in last year’s spring from the world oil demand collapse has been eliminated, and storage has been further whittled down toward the 2010-2014 average, which we sense is the de-facto target of OPEC+.
As far as determining the current “fair value” of oil, we revert back to our analysis of inventories. In this regard, the key measure of global stocks is estimated by us to have seen a much larger than normal draw during November. While there are many moving parts to an oil balance model, the entirety of all those supply and demand variables intersect at storage. Accordingly, inventory changes in storage levels show a strong relationship with changes in oil prices, as one should expect. A proprietary model we developed and maintain, and recently updated to account for our end-November storage figure, puts the current “fair value” for 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 emergency inventory sales from the US — 18 million barrels are scheduled to be tendered by the end of this week. Historically, we have found that when emergency oil stocks are sold for non-emergencies, the price of crude actually rallies through the release. Given that current oil prices are well below their “fair value,” we expect that the US strategic petroleum reserve release will likely see that same price response.
• Michael Rothman is the president and founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research. He has nearly 40 years of experience covering the global energy markets and has been attending OPEC meetings since 1986. He is also the author of “Cornerstones of Life” which is available on Amazon.