Oil Market Report - August 2020

• Global oil supply rose by 2.5 mb/d to 90 mb/d in July after Saudi Arabia ended its voluntary 1 mb/d cut, the UAE exceeded its OPEC+ target and US production started to recover. While OPEC+ cuts ease by nearly 2 mb/d this month and other producers restore shut-in volume, compensation for earlier OPEC+ over-production could keep world supply steady in August. Global supply looks set to fall by 7.1 mb/d in 2020 and rise by 1.6 mb/d next year.
• Global oil demand is expected to be 91.9 mb/d in 2020, down 8.1 mb/d y-o-y. In this Report, we reduce our 2020 forecast by 140 kb/d, the first downgrade in several months, reflecting the stalling of mobility as the number of Covid-19 cases remains high, and weakness in the aviation sector. China’s oil demand is recovering strongly, up 750 kb/d y-o-y in June. We have revised down our 2021 global demand estimate by 240 kb/d to 97.1 mb/d, mainly due to aviation sector weakness.
• Global refinery intake is recovering, but the pace will lag behind the demand rebound as product inventory levels are very high. In July, crude runs are estimated at 3.7 mb/d above the low point in May, with another 5.6 mb/d ramp-up expected by end-2020. In 2020, runs will decline by 6.9 mb/d but in 2021 they will rebound by only 4.5 mb/d. Runs in 2021 will be 2.7 mbd below the historical peak seen in 2018.
• OECD industry stocks rose by 16.2 mb (0.54 mb/d) to 3 235 mb in June, and in the first half of 2020 they increased at an average rate of 1.78 mb/d. In the US, preliminary data for July show that commercial crude stocks fell by 18.2 mb. In Europe, they rose by 3.6 mb while falling in Japan by 1.6 mb. As the market rebalances and the forward price curve flattens, floating storage of crude oil fell by 35.7 mb from its all-time high in June, to 184.8 mb in July.
• Crude prices remained in a narrow ~$3.0/bbl range in July, averaging $40.77/bbl for NYMEX WTI and $43.22/bbl for ICE Brent. The forward price curve contango deepened again in July after flattening in June, as forward prices (anticipating a tighter market) rose faster than prompt prices. Middle distillate and naphtha cracks made modest gains. Freight rates fell to levels not seen in months or even years.

• Global oil supply rose by 2.5 mb/d to 90 mb/d in July after Saudi Arabia ended its voluntary 1 mb/d cut, the UAE exceeded its OPEC+ target and US production started to recover. While OPEC+ cuts ease by nearly 2 mb/d this month and other producers restore shut-in volume, compensation for earlier OPEC+ over-production could keep world supply steady in August. Global supply looks set to fall by 7.1 mb/d in 2020 and rise by 1.6 mb/d next year.
• Global oil demand is expected to be 91.9 mb/d in 2020, down 8.1 mb/d y-o-y. In this Report, we reduce our 2020 forecast by 140 kb/d, the first downgrade in several months, reflecting the stalling of mobility as the number of Covid-19 cases remains high, and weakness in the aviation sector. China’s oil demand is recovering strongly, up 750 kb/d y-o-y in June. We have revised down our 2021 global demand estimate by 240 kb/d to 97.1 mb/d, mainly due to aviation sector weakness.
• Global refinery intake is recovering, but the pace will lag behind the demand rebound as product inventory levels are very high. In July, crude runs are estimated at 3.7 mb/d above the low point in May, with another 5.6 mb/d ramp-up expected by end-2020. In 2020, runs will decline by 6.9 mb/d but in 2021 they will rebound by only 4.5 mb/d. Runs in 2021 will be 2.7 mbd below the historical peak seen in 2018.
• OECD industry stocks rose by 16.2 mb (0.54 mb/d) to 3 235 mb in June, and in the first half of 2020 they increased at an average rate of 1.78 mb/d. In the US, preliminary data for July show that commercial crude stocks fell by 18.2 mb. In Europe, they rose by 3.6 mb while falling in Japan by 1.6 mb. As the market rebalances and the forward price curve flattens, floating storage of crude oil fell by 35.7 mb from its all-time high in June, to 184.8 mb in July.
• Crude prices remained in a narrow ~$3.0/bbl range in July, averaging $40.77/bbl for NYMEX WTI and $43.22/bbl for ICE Brent. The forward price curve contango deepened again in July after flattening in June, as forward prices (anticipating a tighter market) rose faster than prompt prices. Middle distillate and naphtha cracks made modest gains. Freight rates fell to levels not seen in months or even years.

After steadily rising since late May, new confirmed Covid-19 cases appear to be stabilising around 280 000 daily, the highest rate since the early days of the pandemic. Easing of the first wave of confinement measures was bound to lead to a resurgence of cases as normal activity resumed. In many countries, social distancing measures are being re-introduced along with some localised lockdowns. It remains to be seen if the increase in cases heralds a second wave or it is merely a regular fluctuation that we will see over time. Recent mobility data suggest the recovery has plateaued in many regions, although Europe, for now, remains on an upward trend. For road transport fuels, demand in the first half of 2020 was slightly stronger than anticipated, but for the second half we remain cautious and the upsurge in Covid-19 cases has seen us downgrade our estimates, mainly for gasoline. For diesel, there is evidence that the recovery in business and industrial activity combined with ongoing growth in e-commerce are supporting trucking activity as more goods are delivered to customers. Jet fuel demand remains the major source of weakness. In this Report, revised data show that in April the number of aviation kilometres travelled was nearly 80% down on last year and in July the deficit was still 67%. With few signs that the picture will improve significantly soon, we have downgraded our estimate for global jet fuel and kerosene demand. In 2020, demand will be 4.8 million barrels a day (mb/d), or 39%, below the 2019 level, and in 2021 the year-on-year recovery will be just below 1 mb/d. These are the main components of a revision to the total 2020 oil demand picture from a decline of 7.9 mb/d seen in the last Report to 8.1 mb/d in this edition. For 2021, we have reduced the expected rebound in growth to 5.2 mb/d from 5.3 mb/d seen previously. For supply, the major new data point was for production in the United States. In May, crude output fell by nearly 2 mb/d from April’s level and, at 10 mb/d, it was 2.9 mb/d below the alltime high seen in November. However, WTI prices have averaged around $40/bbl since mid-June with little volatility, and US production is starting to rise again. Canada is also seeing production rising and in June output was nearly 5 mb/d, although still about 0.9 mb/d below the peak seen at the end of 2019. Recovery in the two North American giants, with Brazil also growing, comes as the OPEC+ countries ease their output cuts. In July, Saudi Arabia withdrew its voluntary 1 mb/d cut and changes in production elsewhere saw OPEC+ output increase by a net 1.3 mb/d. In August, output could rise again as the 9.6 mb/d of cuts implemented in May ease to 7.7 mb/d. However, if countries that have not hitherto complied with their quotas cut back by enough to bring them into compliance, global oil supply would not necessarily increase significantly. Our balances show that in June demand exceeded supply, and for the rest of the year there is an implied stock draw. However, ongoing uncertainty around demand caused by Covid-19 and the possibility of higher output means that the oil market’s re-balancing remains delicate.

After steadily rising since late May, new confirmed Covid-19 cases appear to be stabilising around 280 000 daily, the highest rate since the early days of the pandemic. Easing of the first wave of confinement measures was bound to lead to a resurgence of cases as normal activity resumed. In many countries, social distancing measures are being re-introduced along with some localised lockdowns. It remains to be seen if the increase in cases heralds a second wave or it is merely a regular fluctuation that we will see over time. Recent mobility data suggest the recovery has plateaued in many regions, although Europe, for now, remains on an upward trend. For road transport fuels, demand in the first half of 2020 was slightly stronger than anticipated, but for the second half we remain cautious and the upsurge in Covid-19 cases has seen us downgrade our estimates, mainly for gasoline. For diesel, there is evidence that the recovery in business and industrial activity combined with ongoing growth in e-commerce are supporting trucking activity as more goods are delivered to customers. Jet fuel demand remains the major source of weakness. In this Report, revised data show that in April the number of aviation kilometres travelled was nearly 80% down on last year and in July the deficit was still 67%. With few signs that the picture will improve significantly soon, we have downgraded our estimate for global jet fuel and kerosene demand. In 2020, demand will be 4.8 million barrels a day (mb/d), or 39%, below the 2019 level, and in 2021 the year-on-year recovery will be just below 1 mb/d. These are the main components of a revision to the total 2020 oil demand picture from a decline of 7.9 mb/d seen in the last Report to 8.1 mb/d in this edition. For 2021, we have reduced the expected rebound in growth to 5.2 mb/d from 5.3 mb/d seen previously. For supply, the major new data point was for production in the United States. In May, crude output fell by nearly 2 mb/d from April’s level and, at 10 mb/d, it was 2.9 mb/d below the alltime high seen in November. However, WTI prices have averaged around $40/bbl since mid-June with little volatility, and US production is starting to rise again. Canada is also seeing production rising and in June output was nearly 5 mb/d, although still about 0.9 mb/d below the peak seen at the end of 2019. Recovery in the two North American giants, with Brazil also growing, comes as the OPEC+ countries ease their output cuts. In July, Saudi Arabia withdrew its voluntary 1 mb/d cut and changes in production elsewhere saw OPEC+ output increase by a net 1.3 mb/d. In August, output could rise again as the 9.6 mb/d of cuts implemented in May ease to 7.7 mb/d. However, if countries that have not hitherto complied with their quotas cut back by enough to bring them into compliance, global oil supply would not necessarily increase significantly. Our balances show that in June demand exceeded supply, and for the rest of the year there is an implied stock draw. However, ongoing uncertainty around demand caused by Covid-19 and the possibility of higher output means that the oil market’s re-balancing remains delicate.