Oil prices (OIL) have edged past $45, thanks to the optimism revolving around the upcoming COVID-19 vaccines. In U.S. alone, the first doses of Pfizer- BioNTech vaccines were delivered to all 50 states. Although this optimism is good for crude oil prices, I firmly believe that prices will be driven by supply- demand fundamentals in the longer run. While U.S and Europe are still reeling under the impact of COVID-19, Asian markets like China, Japan and India are witnessing a revival in fuel demand. With this, let us analyze the current supply- demand fundamentals and its probable impact on oil prices. 

Demand is expected to decline 

According to OPEC’s latest monthly oil market report, global crude oil demand for 2020 is expected to decline by 9.77 million barrels per day. This decline is attributed to sluggish demand growth in OECD Europe and U.S. Even for 2021, OPEC has reduced its oil demand growth by 0.35 million barrels per day, mainly due to uncertainty related to the impact of COVID-19. You can refer the below table for further information and numbers. 

Source: OPEC Oil Market Report, December 2020

Investors must note that although the demand for crude oil in 2021 (95.89 million barrels per day) will be higher than in 2020, it will still be lower than earlier market projections. This factor may have a negative impact on oil prices in the near future. 

Oil supply is expected to increase 

Just when crude oil demand is looking sluggish, supplies are expected to increase in the near future. OPEC has decided to increase its oil production by 500,000 barrels per day beginning next year. It's next meeting is set for January 4, 2021. Investors should also note that OPEC members- Libya and Iran have already voiced their plans of increasing their oil production in 2021. This means that the possibility of any downward revision by OPEC is less likely, as of now. Even Non-OPEC oil production is expected to increase marginally in 2021 when compared to this year. Investors can refer to the below table for more information. 

Source: OPEC Oil Market Report, December 2020

Conclusion 

I firmly believe that market optimism (that is revolving around the different global vaccine development programs) is currently supporting oil prices. However, I am convinced that in the long run, oil prices will be guided by the supply – demand factors mentioned in the above table and my article. This can also be vetted by the consistent movement of oil prices due to inventory build- ups. Investors should note that oil fell by more than 1% this Tuesday, when the American Petroleum Institute (API) announced a crude oil inventory build-up of 1.973 million barrels for week ending December 11, against the market’s expectation of a 1.937 million barrel drop. Even in the previous week, API reported an inventory build-up of 1.14 million barrels against the market’s expectation of a 1.51 million barrel drop. These statistics clearly indicate that oil demand remains weak and the oil market is currently ruled by market sentiments. With this, I expect oil prices to remain below $50 in near future.