Oil Market Report - May 2020

• Better than expected mobility in OECD countries and the gradual easing of lockdown measures led to an upward adjustment of 3.2 mb/d to our global 2Q20 demand number; but it is still sharply down on last year by 19.9 mb/d. Although 2H20 will be slightly weaker than previously forecast, our outlook for 2020 as a whole shows a demand fall of 8.6 mb/d, 0.7 mb/d more than in our previous Report. A resurgence of Covid-19 is a major risk factor for demand.
• Global oil supply is set to fall by a spectacular 12 mb/d in May to a nine-year low of 88 mb/d, as the OPEC+ agreement takes effect and production declines elsewhere. For some OPEC countries, e.g. Saudi Arabia, Kuwait and the UAE, lower May production is from record highs in April. Led by the United States and Canada, April supplies from countries outside of the deal were already 3 mb/d lower than at the start of the year.
• The peak decline for global refining activity has shifted to May as our April throughput estimate was revised up on new data and higher demand. In 2Q20, global runs are expected to fall by 13.4 mb/d y-o-y, with 2020 average throughput down by 6.2 mb/d. Signs of refinery storage bottlenecks started multiplying at the beginning of May, with several refineries in Europe, Asia and Africa reported to be closed for an indeterminate period.
• OECD data for March show that industry stocks rose by 68.2 mb (2.2 mb/d) to 2 961 mb. Total OECD stocks stood 46.7 mb above the five-year average and, due to the weak outlook, now provide an incredible 90 days of forward demand coverage. Preliminary data show that US crude stocks built by 53.7 mb in April (1.8 mb/d), and crude inventories in Europe and Japan also rose by 3.1 mb and 3 mb, respectively. In April, floating storage of crude oil increased by 9.9 mb to 123.8 mb.
• Oil prices fell in April on weak demand due to Covid-19 and record-high Middle Eastern exports. Negative oil futures prices were seen for the first time when NYMEX WTI settled at -$37/bbl the day before the May contract expired. Easing lockdown measures in some countries provided support to gasoline markets; however, jet cracks fell below zero as aviation activity remains depressed. Crude and product shipping costs rose as more vessels were chartered for floating storage.

• Better than expected mobility in OECD countries and the gradual easing of lockdown measures led to an upward adjustment of 3.2 mb/d to our global 2Q20 demand number; but it is still sharply down on last year by 19.9 mb/d. Although 2H20 will be slightly weaker than previously forecast, our outlook for 2020 as a whole shows a demand fall of 8.6 mb/d, 0.7 mb/d more than in our previous Report. A resurgence of Covid-19 is a major risk factor for demand.
• Global oil supply is set to fall by a spectacular 12 mb/d in May to a nine-year low of 88 mb/d, as the OPEC+ agreement takes effect and production declines elsewhere. For some OPEC countries, e.g. Saudi Arabia, Kuwait and the UAE, lower May production is from record highs in April. Led by the United States and Canada, April supplies from countries outside of the deal were already 3 mb/d lower than at the start of the year.
• The peak decline for global refining activity has shifted to May as our April throughput estimate was revised up on new data and higher demand. In 2Q20, global runs are expected to fall by 13.4 mb/d y-o-y, with 2020 average throughput down by 6.2 mb/d. Signs of refinery storage bottlenecks started multiplying at the beginning of May, with several refineries in Europe, Asia and Africa reported to be closed for an indeterminate period.
• OECD data for March show that industry stocks rose by 68.2 mb (2.2 mb/d) to 2 961 mb. Total OECD stocks stood 46.7 mb above the five-year average and, due to the weak outlook, now provide an incredible 90 days of forward demand coverage. Preliminary data show that US crude stocks built by 53.7 mb in April (1.8 mb/d), and crude inventories in Europe and Japan also rose by 3.1 mb and 3 mb, respectively. In April, floating storage of crude oil increased by 9.9 mb to 123.8 mb.
• Oil prices fell in April on weak demand due to Covid-19 and record-high Middle Eastern exports. Negative oil futures prices were seen for the first time when NYMEX WTI settled at -$37/bbl the day before the May contract expired. Easing lockdown measures in some countries provided support to gasoline markets; however, jet cracks fell below zero as aviation activity remains depressed. Crude and product shipping costs rose as more vessels were chartered for floating storage.

In last month’s Report, the focus was on demand destruction on a historic scale, with little immediate relief expected from the supply side as the OPEC+ agreement was not due to come into effect until 1 May. Also, it was unclear when and by how much production would fall in other countries. This dark mood peaked in what the IEA Executive Director called “Black April,” a month that saw the price of the May WTI futures contract plunge to almost minus $40 a barrel. Since then, the outlook has improved somewhat and prices, while still far below where they were before the start of the Covid-19 crisis, have rebounded from their April lows. There are two main reasons for this: the easing of lockdown measures and – more important – steep production declines in non-OPEC countries alongside the commitments made by the OPEC+ agreement.

The gradual relaxation of restrictions on movement is helping demand. We estimate that from a recent peak of 4 billion, the number of people living under some form of confinement at the end of May will drop to about 2.8 billion worldwide. Mobility still remains limited for many citizens, but businesses are starting to reopen gradually and people are returning to work, which will provide a boost to oil demand, albeit a modest one at first. Taking into account these developments as well as new mobility data from advanced economies that was stronger than in our previous forecast, we have raised our 2Q20 demand estimate. For 2020 as a whole, last month’s forecast of a decline of 9.3 mb/d is improved to -8.6 mb/d.

It is on the supply side where market forces have demonstrated their power and shown that the pain of lower prices affects all producers. We are seeing massive cuts in output from countries outside the OPEC+ agreement and faster than expected. This group, led by the United States and Canada, saw output in April 3 mb/d lower than at the start of the year. In June, that drop could reach 4 mb/d, with perhaps more to come. Now, the OPEC+ agreement has come into effect. Assuming full compliance, and factoring in declines in other countries, we estimate a reduction in global supply in May of 12 mb/d, month on month. For June, Saudi Arabia on Monday announced that it will reinforce the agreement by voluntarily cutting production by 1 mb/d more than required. The UAE and Kuwait have followed suit with extra cuts of their own. This means that Saudi production in June will be an extraordinary 4.4 mb/d below April’s record level. By year-end, however, it is the United States that is the biggest contributor to global supply reductions compared with a year ago. US production could be 2.8 mb/d lower than at the end of 2019. For Saudi Arabia, the fall will be 0.9 mb/d assuming 100% compliance with the OPEC+ deal and that the extra voluntary cut applies only to June. OPEC+ producers will meet on 10 June to discuss the state of the market and the progress of the output agreement.

So, oil production is reacting in a big way to market forces and economic activity is beginning a gradual-but-fragile recovery. However, major uncertainties remain. The biggest is whether governments can ease the lockdown measures without sparking a resurgence of Covid-19 outbreaks. Another is whether a high level of compliance with the OPEC+ agreement will be achieved and maintained by all the major parties. These are big questions – and the answers we get in the coming weeks will have major consequences for the oil market.

In last month’s Report, the focus was on demand destruction on a historic scale, with little immediate relief expected from the supply side as the OPEC+ agreement was not due to come into effect until 1 May. Also, it was unclear when and by how much production would fall in other countries. This dark mood peaked in what the IEA Executive Director called “Black April,” a month that saw the price of the May WTI futures contract plunge to almost minus $40 a barrel. Since then, the outlook has improved somewhat and prices, while still far below where they were before the start of the Covid-19 crisis, have rebounded from their April lows. There are two main reasons for this: the easing of lockdown measures and – more important – steep production declines in non-OPEC countries alongside the commitments made by the OPEC+ agreement.

The gradual relaxation of restrictions on movement is helping demand. We estimate that from a recent peak of 4 billion, the number of people living under some form of confinement at the end of May will drop to about 2.8 billion worldwide. Mobility still remains limited for many citizens, but businesses are starting to reopen gradually and people are returning to work, which will provide a boost to oil demand, albeit a modest one at first. Taking into account these developments as well as new mobility data from advanced economies that was stronger than in our previous forecast, we have raised our 2Q20 demand estimate. For 2020 as a whole, last month’s forecast of a decline of 9.3 mb/d is improved to -8.6 mb/d.

It is on the supply side where market forces have demonstrated their power and shown that the pain of lower prices affects all producers. We are seeing massive cuts in output from countries outside the OPEC+ agreement and faster than expected. This group, led by the United States and Canada, saw output in April 3 mb/d lower than at the start of the year. In June, that drop could reach 4 mb/d, with perhaps more to come. Now, the OPEC+ agreement has come into effect. Assuming full compliance, and factoring in declines in other countries, we estimate a reduction in global supply in May of 12 mb/d, month on month. For June, Saudi Arabia on Monday announced that it will reinforce the agreement by voluntarily cutting production by 1 mb/d more than required. The UAE and Kuwait have followed suit with extra cuts of their own. This means that Saudi production in June will be an extraordinary 4.4 mb/d below April’s record level. By year-end, however, it is the United States that is the biggest contributor to global supply reductions compared with a year ago. US production could be 2.8 mb/d lower than at the end of 2019. For Saudi Arabia, the fall will be 0.9 mb/d assuming 100% compliance with the OPEC+ deal and that the extra voluntary cut applies only to June. OPEC+ producers will meet on 10 June to discuss the state of the market and the progress of the output agreement.

So, oil production is reacting in a big way to market forces and economic activity is beginning a gradual-but-fragile recovery. However, major uncertainties remain. The biggest is whether governments can ease the lockdown measures without sparking a resurgence of Covid-19 outbreaks. Another is whether a high level of compliance with the OPEC+ agreement will be achieved and maintained by all the major parties. These are big questions – and the answers we get in the coming weeks will have major consequences for the oil market.