oil hedging considerations for 2021 - investec

1

Oil Hedging Considerations for 2021

13th January 2021

Things Can Only Get Better?

It was mildly amusing to read again the version of this note from the start of last year. It had concluded that there was little to say about demand and it would be supply and the potential growth of US shale that would be the main issue for the market in 2020! A lot of time could be expended discussing the dramatic events of last year, the negative prices in US crude futures, the massive output cut from OPEC, but we must focus on the future and for much of 2021 this predominantly means the competition between the virus and the vaccines. The covid variants that emerged in the UK and South Africa at the end of 2020 cannot be kept in check even with quite strict social distancing and tiers. Only a punitive lock-down can do this and the only way out of that seems to be vaccination. The new variants have been detected in numerous countries around that world and it seems plausible that many more countries will soon be suffering the same challenges as the UK is now, presenting a fresh risk of demand disruption for markets to deal with.

Source: Bloomberg and Investec

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Virus versus the Vaccines: Current State of Play

The table below aims to give an impression of how centres of oil demand are faring in view of virus infections and how significant they are in terms of oil consumption. It is tempting to assume that data from multiple countries, collected into tables is directly comparable, but in practice, interpreting data on virus infection on a comparative basis is fraught with difficulties. Reported infection data is potentially biased by the level of testing. In an attempt to adjust for this, the table below expresses total positive test results as a proportion of the number of tests. This avoids penalising countries like the UK which has a very high level of testing and so is likely to capture a greater proportion of the actual cases in the community. However, it may discriminate against countries with low levels of testing where it is done very selectively – i.e. they only test people with clear symptoms. This could be the case with Other Americas where the proportion of tests returning positive is very high. Also, these figures are cumulative not current and so may not be representative of the current situation in those countries. The number of current serious cases is perhaps a less ambiguous measure. It gives the number of people in intensive care per million of population as of the 5 th January 2021. This number is important because the upper limit on the degree to which any country can allow the virus to spread, is determined by the capacity of its healthcare systems to deal with serious cases. When there are too many very sick people, there is no alternative but to tighten restrictions.

Oil Demand1

(mb/d) Population Infections2 Serious Cases per

1m Population >65s

OECD

USA 20.68 331,997,424 8.2% 89.1 15.4%

Other Americas 5.13 367,225,422 23.0% 49.3 12.1%

Europe 14.28 507,047,443 9.0% 41.9 17.5%

Asia 7.93 177,568,701 3.9% 6.3 23.2%

Total OECD 48.02

Non-OECD

China 14.05 1,439,323,776 0.1% 0.0 10.6%

Asia 14.67 2,322,682,635 7.7% 5.2 5.6%

Middle East 8.3 215,699,075 11.5% 32.9 4.5%

Americas 6.38 349,179,986 24.8% 31.4 7.8%

Former Soviet Union

4.89 279,365,218 7.4% 11.3 12.3%

Africa 4.36 684,990,544 10.2% 3.5 4.1%

Europe 0.8 28,590,689 18.5% 39.0 17.4%

Total non-OECD 53.45

Total 101.47

Source: Worldometer, IEA, Wikipedia and Investec

The Serious Cases number for the USA stands out in particular, especially as it is also the world’s largest consumer. Europe and the rest of the Americas is also high. Asia, particularly China, looks to be in far better shape which helps to offset some of the risk from Europe and the USA and was a big help for oil demand in the second part of 2020.

1 IEA Monthly Oil Report January 2020, forecasts for 2020 demand 2 Worldometer 5th December, infection rates calculated from total infection and total test figures to give the proportion of tests that are positive

3

Vaccine Approvals and Production Capacity

Three vaccines have completed trials and are now approved in various countries. Clearly vaccines are seen as the ultimate way out of restrictions and back to normality, but how quickly can they be produced and when will this make a difference? The table below shows production estimates for the three approved vaccines as well as for others that may appear later in 2021.

Production of Doses in 20213 (bln)

Astra Zeneca 3.0

Moderna 0.5 to 1.0

Pfizer 1.3

Total 4.8 to 5.3

Sinopharm 0.2

Sinovac 0.3

CanSino 0.1 to 0.2

Johnson & Johnson 1

Gamaleya 0.03

Novavax 2

Total 3.7 to 3.8

Source: Wall Street Journal

Given that two does are required, it is clear that much less than half of the world’s population could be vaccinated in 2021 by the three that have so far complete trials. Also, the bulk of this capacity will be met by the Astra Zeneca vaccine, which has not yet been approved beyond the UK. How many people need to be vaccinated for us to get back to normal? Presumably the ideal outcome would be global heard immunity. The Lancet published an article on heard immunity4 which gave a formula for the percentage of a population that would need to be vaccinated as a function of the efficacy of the vaccine and the R-number where the vaccine is allowed to spread unhindered by contact restrictions or lockdowns. For example, if the efficacy is high at 90% and the R-number is in the range 2.5 to 3.5 (the figures suggested in the paper), then 66 to 79% of the population would need to be vaccinated to achieve heard immunity. There is uncertainty over the R-number though, particularly in view of newer strains such as the B117 strain that is becoming increasingly dominant in the UK. This is known to be more easily transmitted, but there is no data on how quickly it might spread unchecked. It does appear that something like 70% of the global population would need to be vaccinated if efficacy is as high as 90%. There is uncertainty about the efficacy of the Astra Zeneca though. It might be as low as 60% or as high as 90%, depending on how the two doses are issued. With any vaccine there is uncertainty over how long immunity will last and how effective existing vaccines will be on new strains. Overall, it is hard to draw any firm conclusions as to how quickly vaccines will bring the virus under control this year, both because the rate of vaccine delivery is relatively slow and because of uncertainties over the impact derived from any particularly level of vaccination. A further danger is the possibility of new strains of the virus which may lead to a game of cat and mouse between the scientists developing vaccines and the process of natural selection acting on the virus.

3 Wall Street Journal: https://www.wsj.com/articles/covid-19-vaccines-whats-coming-and-when-11598882964 4 Lancet: Challenges in creating herd immunity to SARS-CoV-2 infection by mass vaccination, https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(20)32318-7/fulltext

https://www.wsj.com/articles/covid-19-vaccines-whats-coming-and-when-11598882964

https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(20)32318-7/fulltext

4

Oil Supply, Demand and Inventory Trends in 2020

Oil demand in 2020 was of course entirely dominated by the covid disruptions. At its peak, disruptions brought consumption down by over 20 mb/d relative to the average of 2019 demand (a 20% decline). The situation improved over the course of the year, but was still down by nearly 4 mb/d by the end of the year.

Source: EIA and Investec

After a brief and very badly timed production war between Saudi Arabia and Russia in April, OPEC+ led the way in redressing the oversupply and the danger of rapidly filling inventories. The reduction in output lagged the disruption to supply, but has been far more sustained, leading to the market ending 2020 with production well below demand.


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Consumption Trends in 2020

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Production Trends in 2020

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5

That the market entered a deficit in late summer of 2020 (in spite of OPEC+ increasing output), is clear from the chart below, which shows OCED inventories falling back from highs around 3.2 bln barrels, to 3.0 bln by the end of the year.


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Market Balance and Inventory Trends in 2020

Supply Change Demand Change OECD Inventory

6

OPEC Policy and its Implications for 2021

OPEC+, which comprises all OPEC members with the exception of Iran, Libya and Venezuela, along with non-OPEC members including Russia, Kazakhstan and Mexico, agreed to a coordinated response to the covid crisis, along with endorsement from other non-OPEC producers such as the US. The deal announced in April last year involved the following cuts:

9.7 mb/d, starting on 1 May 2020 to 30th June

7.7 mb/d July to Dec 2020

5.8 mb/d 1 January 2021 to 30 April 2022 The baseline for the calculation of the adjustments was oil production of October 2018, except for Saudi Arabia and Russia, where a baseline level was 11.0 mb/d will be applied. The agreement was indented to be valid until 30 April 2022, but subject to review at the end of 2020. When OPEC+ met early in December last year, it was faced with enormous uncertainty over how quickly vaccines would enable demand to recover in 2020, or on the other hand, how much demand may be hampered if infections worsened before vaccines became widely available. Consequently it agreed on a wait and see approach in which production would increase by 500 kb/d in January to satisfy those who that wanted something, but with a review of the situation in monthly meetings starting in January. It also said that any production increments agreed at those meetings will be no greater than 500 kb/d, implying that the most rapid increase would be to add additional production of 500 kb/d in each of January, February, March and April with a total of 2 mb/d over that period. At the first of these meetings held in earlier this month, OPEC+ agreed some slight increases in Russian and Kazakh output in February and March, while everyone else remained on hold. Saudi Arabia surprised everyone by going the extra mile with an additional voluntary cut of 1 mb/d over February and March. Saudi Energy Minister Prince Abdulaziz bin Salman was quoted as saying: “We are the guardian of this industry. This gesture of goodwill made by our leadership, in the name of His Royal Highness the Crown Prince Mohammad bin Salman.” The limits are summarised in the following table:

Jan-21 Feb-21 March-21

Saudi Limit 9.12 9.12 9.12

Saudi Voluntary Cut 0.00 -1.00 -1.00

Other OPEC10 Limit 13.00 13.00 13.00

OPEC10 Total 22.12 21.12 21.12

non-OPEC 14.53 14.61 14.68

OPEC+ 36.65 35.73 35.80

Venezuela 0.40 0.40 0.40

Libya 1.10 1.10 1.10

Iran 1.90 1.90 1.90

OPEC 25.52 24.52 24.52

Source: OPEC

In essence, the Saudi cut of 1m b/d in Feb and March offsets the increase in Libyan production at the end of 2020 and the 500 kb/d increase from OPEC+ in January. In other words it brings the output from OPEC+ and non-OPEC+ OPEC members, back down to September / October 2020 levels.

7

OPEC has often said that it does not target a particular oil price, but it certainly has targeted inventories. The organisation generally does not like very low inventories which force up prices to levels that incentivises lots of non-OPEC production, nor do they like very high inventories which lead to very depressed spot physical prices. The chart below shows how OPEC production and OECD inventories have varied over time. By reaching 3.2bln barrels last year, inventories went well above the levels OPEC would consider to be consistent with a stable market.


In considering what this means for the balance of markets in 2021, we assume OPEC would favour inventories returning to levels around 2.9bln barrels which were common in 2018 and 19. As there is so much uncertainty over the path of the virus we now look at a number of illustrative scenarios based on EIA figures5.

5 US Energy Information Administration, Short Term Energy Outlook data released 8th December 2020, https://www.eia.gov/outlooks/steo/data/browser/

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https://www.eia.gov/outlooks/steo/data/browser/

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Scenario 1 – Use EIA forecasts but with OPEC additional production from April

If OPEC+ stick to the figures highlighted in the table above in February and March and then increase output in April by 1.5 mb/d, to add in the rest of the 2 mb/d they had originally intended to add in January, plus Saudi Arabia reverses its voluntary 1 mb/d cut, the market looks set to be significantly under supplied in over this year. This would take OECD inventories well below the pre-covid levels.


Scenario 2 – Use EIA forecast but solving for OPEC output so that inventory of 2,900 mb is achieved

Scenario 1 suggests that OPEC cuts are too aggressive as they lead to a sharp reduction in inventories that will lead to higher prices and, at some point, a resurgence of non-OPEC output. If the EIA’s demand and non-OPEC supply forecasts holds good, OPEC can afford a higher level of production in 2020.


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Scenario 3 – Softer US and European demand in early 2021

The implication of Scenario 2 is that OPEC and in particular Saudi Arabia, are much less confident about demand than the EIA or many other forecasters. Otherwise they would have charted a path for higher output. In the scenarios below, demand in Europe and the US is assumed to decline in February and to be soft in March, to model a resurgence in the virus, especially because of the risk posed by new strains. This requires OPEC to steadily relax its cuts beyond March to target 2,900 mb of OECD Inventories.


Scenario 4 – Demand Shock in early 2021

Here it is assumed that there is a more widespread resurgence in the virus, including in China, leading to surpluses building significantly again early this year. OPEC is then able to release its cuts only gradually.


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Scenario 5 – Vaccine roll-out is accelerates more rapidly than expected and demand recovers strongly

If European and US consumption returns to 2019 levels by May (i.e. from May onwards, consumption in each month in 2021 is the same as in 2019) OPEC can quickly increase production back to 2018 levels – which is before sanctions on Iran had cut OPEC output.


A few conclusions can be drawn from reviewing these scenarios:

OPEC is well prepared for a moderate disappointment in demand in Q1 of this year

A more significant outbreak, perhaps from the new strain taking hold in China, would be a different matter. Though even then, OPEC may only need to delay reductions in cuts rather than deepen them

If demand in Europe and the US does increase as anticipated by the EIA, OPEC can increase output more quickly than it currently envisages

The detailed tables for these data are in appendix B

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Will OPEC have to compete with other producers in 2021

As the price of crude has risen above 50 $/b, the question naturally arises as to whether non-OPEC production will be stimulated, particularly OPEC’s bane – US shale. US shale crude production fell sharply in 2020 from a peak of over 9 mb/d to a low of 6.7 mb/d in May – a fall of 25%. Output recovered to nearly 8m b/d in the late summer, but fell again into the end of the year.

Source: Bloomberg, EIA and Investec

This is likely to have been driven by previously drilled, but uncompleted wells being brought into production, thus enabling output to recover without the cost of drilling new wells. The chart below seems to support this theory as it shows the large “stock” of previous drilled but uncompleted wells (DUCs) falling throughout 2020, while there has been an uptick in well completions (putting them into production) in the second half of 2020. Notice that the fall in drilling activity and reliance on previously drilled wells to maintain production, began in 2019, well ahead of covid, suggesting that the economics of shale production had been problematic even then.

Source: Bloomberg, EIA and Investec

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Free cash flow generation reported in the quarterly filings of US independent producers, does not stand out as being as bad as might have been expected in 2020, or rather it is as bad and volatile as it has always been.


In the past, it has proved to be a mistake to write off US shale. Indeed the International Energy Agency Executive Director, Fatih Birol, was recently quoted by Bloomberg as saying that a “big chunk” of US shale is profitable at current oil prices. He went on to say that many shale producers will be able to increase production this year and next, and in the short term “we will need shale oil from the United States to fill the gap” in the oil balance, but that they “shouldn’t underestimate” the electrification of the transportation sector and its impact in reducing demand in the future. Shale producers now have an additional challenge to contend with though – Joe Biden. His election website set out an environmental plan that includes the following6:

To ensure the US achieves a 100% clean energy economy and reaches net-zero emissions no later than 2050, on day one of his administration, Biden will sign a series of new executive orders and he will demand that Congress enacts legislation in the first year of his presidency that:

o Establishes an enforcement mechanism that includes milestone targets no later than the end of 2025 o Makes an historic investment in clean energy and climate research and innovation o Incentivizes the rapid deployment of clean energy innovations across the economy, especially in communities

most impacted by climate change

Make smart infrastructure investments to rebuild the nation and to ensure that our buildings, water, transportation, and energy infrastructure can withstand the impacts of climate change

Rally the rest of the world to meet the threat of climate change by recommitting the United States to the Paris Agreement on climate change and leading an effort to get every major country to ramp up the ambition of their domestic climate targets

Stand up to the abuse of power by polluters who disproportionately harm communities of colour and low-income communities

Has committed that he will not to accept contributions from oil, gas and coal corporations or executives

Will make an historic investment in a clean energy future and environmental justice, paid for by rolling back the Trump tax incentives that enrich corporations at the expense of American jobs and the environment.

The climate and environmental justice proposal will make a federal investment of $1.7 trillion over the next ten years, leveraging additional private sector and state and local investments to reach more than $5 trillion.

The plan will be paid for by reversing the excesses of the Trump tax cuts for corporations, reducing incentives for tax havens, evasion, and outsourcing, ensuring corporations pay their fair share, closing other loopholes in the tax code that rewards wealth not work, and ending subsidies for fossil fuels.

Now that Biden has control of the Senate as well as the House of Representative, he will have no excuse not to deliver on this. Clearly the Biden era will lead to a very different era for US producers than that of Trump.

6 https://joebiden.com/climate-plan/

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Occidental EOG Pioneer Devon Marathon Hess

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Iran

Iran has escalated tensions with the West by publicly confirming the production of enriched uranium at an underground nuclear facility and seizing a South Korean oil tanker transiting the Persian Gulf. Iran has been demanding that South Korean banks release $7 billion in funds frozen because of US sanctions. Biden has said that he wants to build on the 2015 deal with a new agreement to “tighten and lengthen Iran’s nuclear constraints, as we address the missile program.” During the presidential campaign, he also promised to confront Iran’s human-rights record and its “destabilizing activities, which threaten our friends and partners in the region.” But the president-elect maintains that the only way to negotiate a new framework is by first returning to the old one. Iran’s escalation presents an early challenge to Biden’s ambition to reinvigorate the old deal. While a rapprochement between the US and Iran might ultimately lead to a resumption of Iranian crude exports, there is a tremendous amount of mutual hostility that will not fade immediately when Trump ceases to be President.

Oil and Refined Products

In some ways 2020 was an even more challenging year for refined product markets than it was for crude. Jet fuel is typically a premium product in the barrel, but fell to a discount to the price of Brent as global aviation demand collapsed. Meanwhile, typically unloved products like high sulphur fuel oil (HSFO) and propane rose relative to crude prices. Demand for HSFO remained relatively strong, while overall oil demand fell, leaving refineries struggling to match the product mix that consumers wanted. Similarly, propane rose on higher home cooking demand during lock-downs in emerging markets and continued to rise into the end of the year, along with natural gas prices, as a result of severe cold weather in Asia.


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BOE Ratios to Brent

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The Market

Becoming More Bullish

Speculators are now as bullish on oil as they have been at any time over the last two years, though positions are still well below levels seen in 2018. The extent of speculative bets on Brent and US crude futures, that oil prices would rise, increased sharply from the end of 2020. Meanwhile, investors believing oil prices would fall, cut their short positions.

Source: CFTC, Bloomberg, Investec

Producer hedging (selling future oil production) has remained surprisingly steady throughout 2020, but there was a noticeable spike in put option buying activity at the peak of the crisis, as producers paid up to buy disaster protection in the form of put options.

Source: CFTC, Bloomberg, Investec

Producer hedging with futures picked up into the end of the year, while option hedging dropped off as producers took advantage of higher prices while perhaps feeling they had already paid out enough in option premium to buy options during 2020.

0m

100m

200m

300m

400m

500m

600m

700m

800m

900m

Jan-1

9

Feb

-19

Mar-1

9

Ap

r-19

May-1

9

Jun

-19

Jul-1

9

Au

g-19

Sep

-19

Oct-1

9

No

v-19

Dec-1

9

Jan-2

0

Feb

-20

Mar-2

0

Ap

r-20

May-2

0

Jun

-20

Jul-2

0

Au

g-20

Sep

-20

Oct-2

0

No

v-20

Dec-2

0

Bar

rels

Brent + WTI Managed Money Positions

Short Long Net

0m

50m

100m

150m

200m

250m

300m

350m

0m

500m

1000m

1500m

2000m

2500m

Jan-1

9

Feb

-19

Mar-1

9

Ap

r-19

May-1

9

Jun

-19

Jul-1

9

Au

g-19

Sep

-19

Oct-1

9

No

v-19

Dec-1

9

Jan-2

0

Feb

-20

Mar-2

0

Ap

r-20

May-2

0

Jun

-20

Jul-2

0

Au

g-20

Sep

-20

Oct-2

0

No

v-20

Dec-2

0

Op

tio

ns

(Bar

rels

)

Futu

res

(Bar

rels

)

Producer Hedging (Brent + WTI)

Futures Options

15

In September and October as inventories were seen to be falling, Brent broke up through its moving average resistance and ultimately headed back towards pre-covid levels after the OPEC+ meeting at the start of this year.

Source: Bloomberg, Investec

The behaviour of the US dollar has also influenced oil prices. US dollar strength tends to weaken oil prices in USD terms and vice versa. This provides another link between oil prices and the macro world and interest rates. Correspondingly, the price of oil rallied into the end of last year as the dollar weakened against the Euro.


15

25

35

45

55

65

75

85

95

Jan-1

8

Ap

r-18

Jul-1

8

Oct-1

8

Jan-1

9

Ap

r-19

Jul-1

9

Oct-1

9

Jan-2

0

Ap

r-20

Jul-2

0

Oct-2

0

Jan-2

1

ICE

Bre

nt

Fro

nt

Co

ntr

act

($/b

)

Recent Brent Price History

Price

50-day Ave

100-day Ave

200-day Ave

1

1.05

1.1

1.15

1.2

1.25

0

10

20

30

40

50

60

70

80

90

100

Dec-1

6

Ma

r-17

Jun

-17

Se

p-1

7

Dec-1

7

Ma

r-18

Jun

-18

Se

p-1

8

Dec-1

8

Ma

r-19

Jun

-19

Se

p-1

9

Dec-1

9

Mar-2

0

Jun

-20

Se

p-2

0

Dec-2

0

EUR

ICE

Bre

nt

Fro

nt

Co

ntr

act

($/b

)

Brent and EUR

Brent EUR

16

Looking at the very long term, there is a downward sloping trend-line from the all-time high in 2008 that forms a resistance around 90 $/b, which Brent has not come close to testing. There is also a shorter term trend-line resistance from the high of 2018 and the high just before the covid crisis. This currently limits Brent in the 60 $/b area. A break through this could be very significant from a technical point of view and could enable Brent to move into a 60 to 80 $/b range. On the downside, there is a support from the rally up from 2020 lows.


0

20

40

60

80

100

120

140

160

Jan-0

1

Au

g-01

Mar-0

2

Oct-0

2

May-0

3

Dec-0

3

Jul-0

4

Feb

-05

Sep

-05

Ap

r-06

No

v-06

Jun

-07

Jan-0

8

Au

g-08

Mar-0

9

Oct-0

9

May-1

0

Dec-1

0

Jul-1

1

Feb

-12

Sep

-12

Ap

r-13

No

v-13

Jun

-14

Jan-1

5

Au

g-15

Mar-1

6

Oct-1

6

May-1

7

Dec-1

7

Jul-1

8

Feb

-19

Sep

-19

Ap

r-20

No

v-20

Brent long-term history

17

Summary

The outlook for 2021 is incredibly uncertain. The usual approaches used to estimate supply and demand for oil are of limited use to us as demand is now dependent on a competition between medical science and a virus. The rally so far this year has been propelled by Saudi Arabia keeping more oil out of the market than seems necessary, but the Saudi move might be quite a reasonable action given the dangers facing demand in the coming weeks.

Investors have bought oil enthusiastically of late, presumably feeling the market was undervalued relative to the moves higher seen in equities. With vaccines offering a route out of the virus abyss in the not too distant future, equity investors have been keen to buy into the covid recovery story now that there are only perhaps a few months more of poor corporate earnings to discount into the current price. This logic does not work so well for oil though, as the physical product needs to be stored in tanks, not as digits in the memory of a computer. Consequently it is harder to look beyond short term negativity in oil than it is for equities. It seems odd that the forward prices to the end of 2021 or 22 are well below the spot price. We need to go back to 2005 to see the 12month future trading below the front contract with the market as low as it is now. But investors mainly look to the front when taking bullish positions. In combination with (still) limited demand from consumers such as airlines to buy oil forwards, which might otherwise have helped long dated prices, this has allowed this inversion in the forward curve. As ever, oil prices will be susceptible to any large pull-back in equity markets.

The recovery in Demand will become more firmly entrenched in time. The scenario analyses presented above suggests that provided there is no significant further demand disruption in the first quarter, OPEC will need to restore its production over the summer of 2021 or someone else will need to come in to fill the void. At which point OPEC will return to the perennial dilemma over how to manage non-OPEC production. The organisation will be looking closely at how producers in the US, in particular, react to prices now being well above 50 $/b

Biden’s environmental policies may also have a significant bearing on US producers this year and beyond. Perhaps a cleaner industry with less flaring and methane leakage will eventually emerge, that is ultimately more investable. In the short term though, this is yet another challenge hanging over US production.

Overall, we can say with confidence that 2021 will be interesting year, but hopefully not as interesting as last year.

18

What to look out for in 2021

Here is a brief summary of some of the factors which could have a bearing on oil prices in 2021 and which could help in interpreting the sustainability of price trends during the course of this year: The Virus and the Vaccines

Absolutely key for the next few weeks will be any signs that new variants are taking hold in continental Europe, the US and possibly China

The experience of the UK shows how the new variant can develop from a few isolated cases to become the dominant strain a couple of months

Rolling out vaccinations as quickly as possible will be vital to head off any new resurgence OPEC Production

OPEC production figures for January and February should be closely monitored to see whether members are complying with the cuts. These will be available in the middle of February and March respectively (see Appendix A)

The next key decision point will be in early February when OPEC+ will review the situation again Technical Levels

Downside o The uptrend from the November low provides support in the low to mid 50s o Having rallied to the mid-50s, the 50 $/b area is now a support level o Moving average support is at 41.30 $/b (200-day), 45.20 $/b (100-day) and 48.20 $/b (50-day) o Trend-line support from the lows April and November comes at around 43 $/b

Upside o 56 $/b recent high and lows of mid-2019 o 60 $/b the figure o Term trend-line resistance from the high of 2018 and the high just before the covid crisis. This currently limits

Brent in the 60 $/b area. A break through this could be very significant from a technical point of view and could enable Brent to move into a 60 to 80$/b range.

US Shale

Need to keep a close eye for signs of higher prices stimulating production in the US Geopolitical Risks

The Middle-East has been relatively quiet for much of this year, unless it is just that we have been too preoccupied to notice what is happening

It does not seem likely that a renewed diplomatic push from the US under Biden for a deal with Iran, will lead to its crude flowing to international markets anytime soon

Now that Libyan production has resumed and is pretty much at full capacity, the main risk would be of it stopping again Inventories

Inventories are the acid test of views on the balance of supply and demand

The first quarter is usually soft for crude demand as refineries undergo maintenance, but we may see the market in a deficit in February and March if demand holds up

Investors

Investor positions became more bullish towards the end of last year. Investor activity tends to exacerbate moves at the front end of the curve and adds to momentum in market trends

The bull run in equities continues particularly in the US. Recently oil prices have tracked moves higher as investors look for covid recovery investments. A sharp unwind in equity prices could well be negative for oil

19

Appendix A – Reporting Schedules and Key Dates

IEA Oil Market Report

Publication dates are as follows:

19 January

11 February

17 March

14 April

12 May

11 June (forecasts extended to 2022 in this report)

13 July

12 August

14 September

14 October

16 November

14 December The report is published at 9am London time OPEC 2021 Meetings

• 4 March • Early June – not yet fixed • November/December – not yet fixed

US Inventory Numbers

3:30 pm each Wednesday (Except in weeks with a US public holidays when the release is at 4:00pm on Thursday)

20

Appendix B – Scenario Tables

Scenario 1 – Use EIA forecasts but with OPEC additional production from April

Jan-21 Feb-

21 Mar-21

Apr-21

May-21

Jun-21

Jul-21

Aug-21

Sep-21

Oct-21

Nov-21

Dec-21

Production

United States 18.4 18.4 18.4 18.5 18.7 18.7 18.8 18.8 18.9 18.8 19.2 19.2

Russia 10.3 10.4 10.5 10.6 10.7 10.7 10.7 10.7 10.8 10.8 10.8 10.8

OPEC crude 25.5 24.5 24.5 27.0 27.0 27.0 27.0 27.0 27.0 27.0 27.0 27.0

Other 40.0 40.0 40.0 40.2 40.3 40.6 40.7 40.8 40.8 41.1 40.9 40.5

Total 94.2 93.3 93.4 96.4 96.6 97.0 97.2 97.4 97.5 97.8 97.9 97.5

Consumption

United States 19.0 19.4 19.5 19.4 19.6 19.9 19.8 20.4 19.9 20.2 20.4 20.0

Europe 12.1 13.1 12.9 13.0 12.8 13.4 13.6 13.5 13.9 13.7 13.4 13.1

Asian & Oceania ex China and India

16.2 16.8 16.4 16.0 15.9 15.9 15.9 16.1 16.0 16.1 16.6 17.1

China 14.8 15.3 15.2 15.5 15.3 15.1 15.1 14.6 15.4 14.5 15.4 15.8

India 4.6 5.0 5.0 4.9 5.0 4.9 4.7 4.5 4.6 4.7 4.9 5.0

Other 27.4 28.3 28.1 28.1 28.7 29.6 29.8 30.0 29.8 29.5 29.1 29.4

Total 94.2 97.7 97.0 96.8 97.2 98.7 98.9 99.1 99.6 98.7 99.7 100.4

Balance - 0.0 - 4.5

- 3.6

- 0.5

- 0.5

- 1.7

- 1.7

- 1.7

- 2.1

- 0.9

- 1.8

- 2.9

OECD Inventory 3,006 2,880 2,770 2,756 2,740 2,689 2,636 2,583 2,519 2,491 2,437 2,348

Scenario 2 – Use EIA forecast but solving for OPEC output to that achieves inventory of 2,900 mb

Jan-

21 Feb-

21 Mar-

21 Apr-

21 May-

21 Jun-

21 Jul-

21 Aug-

21 Sep-

21 Oct-

21 Nov-

21 Dec-

21

Production

United States 18.4 18.4 18.4 18.5 18.7 18.7 18.8 18.8 18.9 18.8 19.2 19.2

Russia 10.3 10.4 10.5 10.6 10.7 10.7 10.7 10.7 10.8 10.8 10.8 10.8

OPEC crude 25.5 24.5 28.7 27.5 27.5 28.7 28.7 28.7 29.2 27.9 28.8 29.9

Other 40.0 40.0 40.0 40.2 40.3 40.6 40.7 40.8 40.8 41.1 40.9 40.5

Total 94.2 93.3 97.6 96.8 97.2 98.7 98.9 99.1 99.6 98.7 99.7 100.4

Consumption

United States 19.0 19.4 19.5 19.4 19.6 19.9 19.8 20.4 19.9 20.2 20.4 20.0

Europe 12.1 13.1 12.9 13.0 12.8 13.4 13.6 13.5 13.9 13.7 13.4 13.1


16.2 16.8 16.4 16.0 15.9 15.9 15.9 16.1 16.0 16.1 16.6 17.1

China 14.8 15.3 15.2 15.5 15.3 15.1 15.1 14.6 15.4 14.5 15.4 15.8

India 4.6 5.0 5.0 4.9 5.0 4.9 4.7 4.5 4.6 4.7 4.9 5.0

Other 27.4 28.3 28.1 28.1 28.7 29.6 29.8 30.0 29.8 29.5 29.1 29.4

Total 94.2 97.7 97.0 96.8 97.2 98.7 98.9 99.1 99.6 98.7 99.7 100.4

Balance - 0.0 - 4.5 0.6 - - - - - - - - -

OECD Inventory 3,006 2,880 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900

21

Scenario 3 – Softer US and European demand in early 2021

Jan-

21 Feb-

21 Mar-

21 Apr-

21 May-

21 Jun-21 Jul-21 Aug-

21 Sep-

21 Oct-

21 Nov-

21 Dec-

21

Production

United States 18.4 18.4 18.4 18.5 18.7 18.7 18.8 18.8 18.9 18.8 19.2 19.2

Russia 10.3 10.4 10.5 10.6 10.7 10.7 10.7 10.7 10.8 10.8 10.8 10.8

OPEC crude 25.5 24.5 24.5 26.0 27.5 28.7 28.7 28.7 29.2 27.9 28.8 29.9

Other 40.0 40.0 40.0 40.2 40.3 40.6 40.7 40.8 40.8 41.1 40.9 40.5

Total 94.2 93.3 93.4 95.4 97.2 98.7 98.9 99.1 99.6 98.7 99.7 100.4

Consumption

United States 18.0 17.0 18.0 19.4 19.6 19.9 19.8 20.4 19.9 20.2 20.4 20.0

Europe 12.1 12.0 12.9 13.0 12.8 13.4 13.6 13.5 13.9 13.7 13.4 13.1


16.2 16.8 16.4 16.0 15.9 15.9 15.9 16.1 16.0 16.1 16.6 17.1

China 14.8 15.3 15.2 15.5 15.3 15.1 15.1 14.6 15.4 14.5 15.4 15.8

India 4.6 5.0 5.0 4.9 5.0 4.9 4.7 4.5 4.6 4.7 4.9 5.0

Other 27.4 28.3 28.1 28.1 28.7 29.6 29.8 30.0 29.8 29.5 29.1 29.4

Total 93.2 94.3 95.5 96.8 97.2 98.7 98.9 99.1 99.6 98.7 99.7 100.4

Balance 1.0 - 1.0 - 2.1 - 1.5 - - - - - - - -

OECD Inventory 3,038 3,009 2,944 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900

Scenario 4 – Demand Shock in early 2021

Jan-21

Feb-21

Mar-21

Apr-21

May-21

Jun-21

Jul-21

Aug-21

Sep-21

Oct-21

Nov-21

Dec-21

Production

United States 18.4 18.4 18.4 18.5 18.7 18.7 18.8 18.8 18.9 18.8 19.2 19.2

Russia 10.3 10.4 10.5 10.6 10.7 10.7 10.7 10.7 10.8 10.8 10.8 10.8

OPEC crude 25.5 24.5 24.5 25.0 25.5 26.0 26.5 28.2 29.2 27.9 28.8 29.9

Other 40.0 40.0 40.0 40.2 40.3 40.6 40.7 40.8 40.8 41.1 40.9 40.5

Total 94.2 93.3 93.4 94.4 95.1 96.0 96.7 98.6 99.6 98.7 99.7 100.4

Consumption

United States 18.0 16.5 17.0 18.0 19.0 19.9 19.8 20.4 19.9 20.2 20.4 20.0

Europe 12.1 11.0 12.0 13.0 12.8 13.4 13.6 13.5 13.9 13.7 13.4 13.1


16.2 16.8 16.4 16.0 15.9 15.9 15.9 16.1 16.0 16.1 16.6 17.1

China 14.8 14.0 14.5 15.5 15.3 15.1 15.1 14.6 15.4 14.5 15.4 15.8

India 4.6 4.0 4.5 4.9 5.0 4.9 4.7 4.5 4.6 4.7 4.9 5.0

Other 27.4 28.3 28.1 28.1 28.7 29.6 29.8 30.0 29.8 29.5 29.1 29.4

Total 93.2 90.6 92.5 95.4 96.6 98.7 98.9 99.1 99.6 98.7 99.7 100.4

Balance 1.0 2.7 0.9 - 1.1 - 1.4 - 2.7 - 2.2 - 0.5 - - - -

OECD Inventory 3,038 3,113 3,142 3,110 3,065 2,984 2,916 2,900 2,900 2,900 2,900 2,900

22

Scenario 5 – Vaccine roll-out is accelerates more rapidly than expected and demand recovers strongly

Jan-

21 Feb-

21 Mar-

21 Apr-

21 May-

21 Jun-

21 Jul-

21 Aug-

21 Sep-

21 Oct-

21 Nov-

21 Dec-

21

Production

United States 18.4 18.4 18.4 18.5 18.7 18.7 18.8 18.8 18.9 18.8 19.2 19.2

Russia 10.3 10.4 10.5 10.6 10.7 10.7 10.7 10.7 10.8 10.8 10.8 10.8

OPEC crude 25.5 25.2 27.7 27.5 29.5 30.3 31.1 30.7 30.0 29.2 30.0 30.9

Other 40.0 40.0 40.0 40.2 40.3 40.6 40.7 40.8 40.8 41.1 40.9 40.5

Total 94.2 94.0 96.6 96.9 99.2 100.3 101.2 101.1 100.5 100.0 100.9 101.4

Consumption

United States 19.0 19.4 19.5 19.4 20.4 20.7 20.7 21.2 20.3 20.7 20.7 20.4

Europe 12.1 13.1 12.5 13.0 13.9 14.2 14.9 14.5 14.5 14.5 14.0 13.7


16.2 16.8 16.4 16.0 15.9 15.9 15.9 16.1 16.0 16.1 16.6 17.1

China 14.8 15.3 15.2 15.5 15.3 15.1 15.1 14.6 15.4 14.5 15.4 15.8

India 4.6 5.0 5.0 4.9 5.0 4.9 4.8 4.7 4.5 4.7 5.1 5.0

Other 27.4 28.3 28.1 28.1 28.7 29.6 29.8 30.0 29.8 29.5 29.1 29.4

Total 94.2 97.7 96.6 96.9 99.2 100.3 101.2 101.1 100.5 100.0 100.9 101.4

Balance - 0.0 - 3.8 - - - - - - - - - -

OECD Inventory 3,006 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900

23

Disclaimer

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oil hedging considerations for 2021 - investec

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