As has so often been the case, OPEC (in this case OPEC+) holds the key to oil market prospects in the coming months. Demand uncertainty remains significant – as it has been since April. Ever since then, OPEC+ has deliberately erred on the side of caution as it has brought the market back to balance and started to erode the massive inventory surplus. The job is far from done, and continued OPEC+ cohesion will remain critical through at least the first half of 2021 if the group is to make major progress towards its mutual goal of bringing inventories back towards normal levels. What to look for:

 OPEC+ to extend its cuts. We expect OPEC+ to extend its “phase 2” cuts from end-4Q through to at least end-1Q21 when it meets on 30 Nov/1 Dec. This is needed to ensure the market doesn’t lurch back into oversupply in the seasonally weak first quarter, but it already looks widely anticipated by the market

 … and to remain cautious: While we see significant improvements in global demand as we move through 2021e, until this demand outlook becomes much clearer we would expect OPEC+ to remain extremely cautious about unwinding its cuts too much. We think there could be room for significantly higher OPEC+ output by 2H21e, but don’t expect this to happen without clear signs from much tighter market conditions and lower inventory levels

 Falling US supply is the other critical element: we think the market’s expectation of a small fall in US output next year is far too optimistic, and we see another fall of >1mbd in 2021e as a key factor in helping tighten global markets further. In our view, monthly well completions probably need to be close to double recent levels to prevent another US supply decline, and this won’t happen without US crude prices of USD50/b+ in our view It follows from our comments on OPEC+ cohesion that possibly the biggest downside risk to prices would come from any premature rupture of its agreement, particularly if it prompted another Saudi surge as we saw in April. On balance, we don’t see this happening – at least in the next few months – although we would expect compliance to fray as market conditions improve through 2021e. Our price forecasts are unchanged. We assume a USD50/b Brent average in 2021e, but with price upsidebiased towards the second half (and a 1Q price of USD45/b). In the longer term, weassume USD60/b Brent, a level high enough to bring back some US supply growth,but not sufficient to push the market back into oversupply.

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