Viewpoint: Nymex crude futures supported into 2021

Nymex light sweet crude futures are likely to remain supported amid bullish expectations of improving global demand.

Light crude prices at the Nymex pricing hub in Cushing, Oklahoma, were pressured by falling demand and high inventories earlier this year and fell to unprecedented levels on 20 April, when they crashed below zero for the first time ever to negative $37.63/bl.

Concerns that Nymex pricing could turn negative a second time turned out to be unfounded, even though inventories at Cushing in October and November reached higher levels than those seen in April.

But by that time the US market looked distinctly different, with US crude production, which was at around 12.2mn b/d just before the light sweet price collapse, at a much more modest 10.5mn b/d.

On the demand side, total US refinery runs were at some 12.4mn b/d in the weeks leading to 20 April but had risen to between 13.5-14mn b/d in November and early December, implying an increase in domestic demand of some 1.5mn b/d since April.

In terms of prices, light sweet crude at Cushing had already been below the $30/bl mark for over a month before its move into negative territory on 20 April. Cushing prices first settled below $30/bl in 2020 on 16 March — coinciding with initial US lockdown restrictions to slow the spread of the Covid-19 pandemic — at $28.70/bl. And in the week leading to 20 April, prices had been averaging just over $20/bl.

In sharp contrast, light sweet prices at Cushing averaged $41.35/bl in November and have been at over $46.65/bl so far in December.

Looking ahead to 2021, the rollout of vaccines for Covid-19 is supporting of crude markets as improvements in global demand are generally expected as a result. Nymex forward prices are showing a relatively shallow contango — with futures prices at premiums to prompt ones — through June 2021.

But additional gains for futures prices have been capped by uncertainty around production levels for the Opec+ group next year and cautious demand projections.

The IEA expects global oil consumption to increase by 5.69mn b/d next year according to its mid-December Oil Market Report (OMR), which is 110,000 b/d lower than the growth predicted a month prior. And the agency now sees 2020 demand falling by 8.82mn b/d, which is a 40,000 b/d steeper decline than forecast in the previous report.

Demand has partially recovered from a 16.3mn b/d fall in the second quarter compared with the same period of 2019, remaining 6.2mn b/d down year on year in the fourth quarter as a result of a second wave of lockdowns, the IEA said.

Crude prices are benefiting from predictions in the OMR that "in 2021, demand for both gasoline and diesel is projected to return to 97-99pc of their 2019 levels."

But Opec revised down its global oil demand growth forecast for next year. It now forecasts that demand will rise by 5.9mn b/d to 95.89mn b/d in 2021. In November it predicted that next year's consumption would grow by 6.25mn b/d.

On the supply side, the Opec+ coalition on 3 December agreed a 482,000 b/d production quota increase in January, with subsequent monthly allocations to be discussed at monthly ministerial meetings in the first quarter of 2021.

And the IEA said next year non-Opec supply is forecast to increase by around 500,000 b/d, partially recovering from an estimated 2.6mn b/d fall this year.

While the outlook is still uncertain, crude markets in the US seem to be focused on supportive news for at least the short term.

By Gus Vasquez