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Energy markets are projected to post a respectable performance, but the strength of the increase is likely to be less than one would expect given the magnitude of the demand recovery in 2021. This is owing to OPEC+ large excess capacity, which will be released into the market to match the recovering demand, strategists at TD Securities apprise.

Key quotes

“On the demand front, the rollout of a COVID-19 vaccine in the early months of the year offers upside promise for both crude and product demand. But while the balance of risks still points in an upward direction, crude is not immune to potential hiccups, as COVID-19 lockdowns can remain a concern in the early months of the year, OPEC rifts emerge and Iran becomes a political talking point once again. All of this suggests that WTI crude could very well return to a 5-handle later in the year, with Brent marginally higher, but a significant move above this level is unlikely as prices are capped by COVID-related weakness in the early part of 2021 and by further increases in OPEC+ production as the rest of the year unfolds.”

“We continue to see firm support from the supply side into 2021, but the strength is certainly easing as uncertainties mount. As such, for crude markets to continue their strength through 2021, a passing of the baton from the supply side to the demand side needs to take place. OPEC+ and US shale declines carried a large portion of the initial recovery and should continue to help, but moving beyond COVID demand dynamics is the key to further upside.”

“With risk appetite firm in the aftermath of the vaccine and OPEC news and prices near the upper bound of the trading range, the easing supply side support along with a still uncertain near-term demand recovery suggest that upside in the crude market could very well be capped for the early months of the year. But as the economy continues to normalize amid a readily available vaccine, and the renewed stimulus impulse kicks off, the ‘Great Rebalancing’ should remain intact. Continued deficits and eroded inventory overhang should ultimately see crude prices return to the $50/bbl region in 2021.”