Oil Market Report - July 2020

• Global oil supply fell by 2.4 mb/d in June, to a nine-year low of 86.9 mb/d. Robust compliance with the OPEC+ output deal and steep declines from other producers, led by the United States and Canada, has cut world oil output by nearly 14 mb/d since April. If the OPEC+ cuts stay in place as agreed, global supply could fall by 7.1 mb/d in 2020 before seeing a modest recovery of 1.7 mb/d next year.
• Global oil demand fell by 16.4 mb/d year-on-year in 2Q20 as lockdowns were imposed to combat the Covid-19 pandemic. Demand rebounded strongly in China and India in May, increasing by 0.7 mb/d and 1.1 mb/d m-o-m, respectively. World oil demand is projected to decline by 7.9 mb/d in 2020 and to recover by 5.3 mb/d in 2021. The recent increase in Covid-19 cases and the introduction of partial lockdowns introduces more uncertainty to the forecast.
• For refiners, any benefit from improving demand is likely to be offset by expectations of much tighter feedstock markets ahead. Refining margins will also be challenged by a major product stocks overhang from the very weak 2Q20. In China, throughputs in June were estimated at a record level of nearly 14 mb/d. Global refinery runs are forecast to fall by 6.4 mb/d in 2020 to 75.1 mb/d and increase by 4.7 mb/d in 2021.
• OECD industry stocks rose by 81.7 mb (2.64 mb/d) to 3 216 mb in May, rising by 2 mb/d since the end of 2019. In the US, preliminary data for June show that commercial stocks built by 24.7 mb (0.8 mb/d), led by products. In June, floating storage of crude oil fell by 34.9 mb from its all-time high in May to 176.4 mb. A tightening crude market balance and a flatter forward price curves reduced the incentive to store oil.
• Crude prices increased in June for the second successive month. North Sea Dated prices oscillated between $38-$43/bbl, supported by tighter fundamentals but capped by rising numbers of Covid-19 cases and economic uncertainty. By early July, prices were firmly above $43/bbl. The flatter contango seen recently will encourage crude stock draws. With ample stocks, product prices lagged crude, squeezing cracks and refinery margins. Freight rates continued to ease over the month. 

• Global oil supply fell by 2.4 mb/d in June, to a nine-year low of 86.9 mb/d. Robust compliance with the OPEC+ output deal and steep declines from other producers, led by the United States and Canada, has cut world oil output by nearly 14 mb/d since April. If the OPEC+ cuts stay in place as agreed, global supply could fall by 7.1 mb/d in 2020 before seeing a modest recovery of 1.7 mb/d next year.
• Global oil demand fell by 16.4 mb/d year-on-year in 2Q20 as lockdowns were imposed to combat the Covid-19 pandemic. Demand rebounded strongly in China and India in May, increasing by 0.7 mb/d and 1.1 mb/d m-o-m, respectively. World oil demand is projected to decline by 7.9 mb/d in 2020 and to recover by 5.3 mb/d in 2021. The recent increase in Covid-19 cases and the introduction of partial lockdowns introduces more uncertainty to the forecast.
• For refiners, any benefit from improving demand is likely to be offset by expectations of much tighter feedstock markets ahead. Refining margins will also be challenged by a major product stocks overhang from the very weak 2Q20. In China, throughputs in June were estimated at a record level of nearly 14 mb/d. Global refinery runs are forecast to fall by 6.4 mb/d in 2020 to 75.1 mb/d and increase by 4.7 mb/d in 2021.
• OECD industry stocks rose by 81.7 mb (2.64 mb/d) to 3 216 mb in May, rising by 2 mb/d since the end of 2019. In the US, preliminary data for June show that commercial stocks built by 24.7 mb (0.8 mb/d), led by products. In June, floating storage of crude oil fell by 34.9 mb from its all-time high in May to 176.4 mb. A tightening crude market balance and a flatter forward price curves reduced the incentive to store oil.
• Crude prices increased in June for the second successive month. North Sea Dated prices oscillated between $38-$43/bbl, supported by tighter fundamentals but capped by rising numbers of Covid-19 cases and economic uncertainty. By early July, prices were firmly above $43/bbl. The flatter contango seen recently will encourage crude stock draws. With ample stocks, product prices lagged crude, squeezing cracks and refinery margins. Freight rates continued to ease over the month. 

We started the second half of this extraordinary year hoping that the worst of the oil market turbulence is behind us. A recovery in economic activity is shown by various indicators, including improved mobility in many regions (see Demand). However, the strong growth of new Covid-19 cases that has seen the re-imposition of lockdowns in some regions, including North and Latin America, is casting a shadow over the outlook. Only time will tell if the economic impact will be serious. In the meantime, in the past few weeks benchmark crude oil futures prices have been remarkably stable with both Brent and WTI hovering around $40/bbl and the contango seen in both futures curves has flattened. In the case of ICE Brent, we even saw a few days of backwardation in June. Futures markets are anticipating a transformation in the oil market from substantial surplus in the first half of the year to a deficit in the second half.

In this Report, new data confirm that the worst of the demand destruction was in the first half of the year when demand fell by 10.75 million barrels per day (mb/d). For the second half we expect an improvement in the level of decline to 5.1 mb/d. We estimate that global oil demand this year will average 92.1 mb/d, down by 7.9 mb/d versus 2019, a slightly smaller decline than forecast in the last Report. This is mainly because the decline in 2Q20 was less severe than expected. For 2021, we have made some minor adjustments to our outlook and demand will be 97.4 mb/d; but due to the improved outlook for 2020 the recovery next year is lower at 5.3 mb/d. Average demand in 2021 will be 2.6 mb/d below the 2019 level with jet/kerosene accounting for three-quarters of the deficit. 

On the supply side, global oil production fell sharply in June to stand 13.7 mb/d below the April level. The compliance rate with the OPEC+ supply agreement was 108%. This includes over-performance by Saudi Arabia which cut production by 1 mb/d more than required, reducing OPEC crude output to its lowest point in nearly three decades. This solid performance by the OPEC+ group has been supplemented by substantial market-driven cuts, mainly in the United States. Total US oil production fell by nearly 1 mb/d in April versus March and we estimate that May and June will see further month- on-month falls of 1.3 mb/d and 0.5 mb/d, respectively. However, in the second half of the year supply could start to grow: we see US production bottoming out and then slowly growing and OPEC+ countries are set to ease their existing cut by around 2 mb/d from August. Also, by the end of the year Libya’s oil production could be as much as 0.9 mb/d higher than it is today.

While the oil market has undoubtedly made progress since “Black April”, the large, and in some countries, accelerating number of Covid-19 cases is a disturbing reminder that the pandemic is not under control and the risk to our market outlook is almost certainly to the downside. 

We started the second half of this extraordinary year hoping that the worst of the oil market turbulence is behind us. A recovery in economic activity is shown by various indicators, including improved mobility in many regions (see Demand). However, the strong growth of new Covid-19 cases that has seen the re-imposition of lockdowns in some regions, including North and Latin America, is casting a shadow over the outlook. Only time will tell if the economic impact will be serious. In the meantime, in the past few weeks benchmark crude oil futures prices have been remarkably stable with both Brent and WTI hovering around $40/bbl and the contango seen in both futures curves has flattened. In the case of ICE Brent, we even saw a few days of backwardation in June. Futures markets are anticipating a transformation in the oil market from substantial surplus in the first half of the year to a deficit in the second half.

In this Report, new data confirm that the worst of the demand destruction was in the first half of the year when demand fell by 10.75 million barrels per day (mb/d). For the second half we expect an improvement in the level of decline to 5.1 mb/d. We estimate that global oil demand this year will average 92.1 mb/d, down by 7.9 mb/d versus 2019, a slightly smaller decline than forecast in the last Report. This is mainly because the decline in 2Q20 was less severe than expected. For 2021, we have made some minor adjustments to our outlook and demand will be 97.4 mb/d; but due to the improved outlook for 2020 the recovery next year is lower at 5.3 mb/d. Average demand in 2021 will be 2.6 mb/d below the 2019 level with jet/kerosene accounting for three-quarters of the deficit. 

On the supply side, global oil production fell sharply in June to stand 13.7 mb/d below the April level. The compliance rate with the OPEC+ supply agreement was 108%. This includes over-performance by Saudi Arabia which cut production by 1 mb/d more than required, reducing OPEC crude output to its lowest point in nearly three decades. This solid performance by the OPEC+ group has been supplemented by substantial market-driven cuts, mainly in the United States. Total US oil production fell by nearly 1 mb/d in April versus March and we estimate that May and June will see further month- on-month falls of 1.3 mb/d and 0.5 mb/d, respectively. However, in the second half of the year supply could start to grow: we see US production bottoming out and then slowly growing and OPEC+ countries are set to ease their existing cut by around 2 mb/d from August. Also, by the end of the year Libya’s oil production could be as much as 0.9 mb/d higher than it is today.

While the oil market has undoubtedly made progress since “Black April”, the large, and in some countries, accelerating number of Covid-19 cases is a disturbing reminder that the pandemic is not under control and the risk to our market outlook is almost certainly to the downside.