The oil market outlook has improved somewhat thanks to the easing of lockdown measures, steep production declines in non-Organization of the Petroleum Exporting Countries and the commitments made by the OPEC+ agreement, according to the International Energy Agency’s May Oil Market Report.
Oil prices, while still far below where they were before the start of the COVID-19 crisis, have rebounded from their April lows.
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,” IEA said.
Improved demand outlook
In the May Oil Market Report, IEA raised its 2020 oil demand change estimate by 690,000 b/d from the previous edition to 91.2 million b/d. Oil consumption will still fall this year by the largest amount in history, 8.6 million b/d, although the estimated decline is a bit less than last month’s estimate of 9.3 million b/d. However, a resurgence of COVID-19 is a major risk factor for demand, IEA said.
Estimated oil demand declined in April by around 25.2 million b/d year-on-year (y-o-y), as more than 4 billion people were subject to some form of confinement. However, the gradual relaxation of restrictions on movement is helping demand. IEA estimates 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. So, IEA expects that the fall of oil demand should narrow to around 21.5 million b/d in May and to 13 million b/d in June, as governments progressively reopen their economies.
Correspondingly, IEA has raised the estimates for this year’s second quarter by 3.2 million b/d on evidence of stronger than expected mobility in some European countries and the US. IEA has also increased Chinese demand figures for March and April. Together, these moves suggest that the decline in oil demand during the first half of the year may not be as steep as first feared.
On the other hand, IEA has slightly revised down its expectations for the second half of 2020 and now expects demand to fall by 4.6 million b/d y-o-y, versus the 4.3 million b/d predicted last month. The downgrade was largely due to China, where the pace of economic recovery is slightly slower than expected. For the US, IEA has raised demand estimates. IEA’s global 2020 second half forecast assumes the virus is largely under control at the global level and that containment measures do not return on a significant scale.
Certain sectors, such as aviation, will continue to suffer through the year’s second half and beyond. According to IEA’s forecasts, demand for jet fuel and kerosene will fall by 1.7 million b/d y-o-y each month between July and December. This is on average about 120,000 b/d lower than forecast in last month’s report. Gasoline demand is expected to decrease by 550,000 b/d per month and combined diesel and gasoil demand by 150,000 b/d, although deliveries of the latter could grow y-o-y in some months.
Faster supply cut
A collapse in demand and prices is forcing producers around the world to shut in supply faster than anyone had anticipated, IEA said.
In April, at 30.73 million b/d, OPEC crude oil output was up 2.38 million b/d m-o-m and 1 million b/d higher than in April 2019. By contrast, non-OPEC oil supply was down 1.1 million b/d y-o-y. Countries that ramped up output in April found an outlet in China, which emerged from COVID-19 confinement and loaded more than 11 million b/d of crude, based on vessel loadings – a record amount. Iraq, Saudi Arabia, Russia, and Brazil all shipped at-or-near their highest ever.
In May, the stage is set for a spectacular decline led by Saudi Arabia as a massive 9.7 million b/d OPEC+ cut takes effect. At the same time, output from the US, Canada, and other producers is set to fall further. All-in-all, a historic decline of 12 million b/d is underway that could cut global supply in May to 88 million b/d, the lowest in 9 years.
Saudi Arabia is on course to cut its crude supply by an astonishing 3.4 million b/d in May and has announced an extra voluntary reduction of 1 million b/d for June. The UAE and Kuwait have followed with extra cuts of their own. This means that Saudi production in June will be an extraordinary 4.4 million b/d below April’s record level.
By year-end, however, it is the US that is the biggest contributor to global supply reductions compared with a year ago, IEA said. By the fourth quarter, US production could fall 2.8 million b/d below the end of 2019.
On the other hand, Saudi output would be 900,000 b/d lower assuming 100% compliance with the OPEC+ deal and that the additional voluntary cut applies only to June. The same comparison for Russia shows that output would be down 1.3 million b/d.
OPEC+ producers will hold discussions on June 10 to monitor the progress of the OPEC+ agreement. As it now stands, cuts are set to ease by 2 million b/d from July through December. However, some producers reportedly favor extending deeper May-June cuts through the end of the year.
Supply of non-OPEC countries as a whole is set to fall by an unprecedented 6.7 million b/d from March through June, before ticking marginally higher through the rest of the year. For 2020 as a whole, supply could decline by a record 3.3 million b/d. While countries taking part in OPEC+ cuts account for nearly 40% of the decline, the largest contribution is from the US where output could fall more than 1.1 million b/d for the year on average. Brazil and Norway have also shut in production, even though new projects are expected to keep output up y-o-y.
Refining, stocks
The peak decline for global refining activity has shifted to May as April throughput estimate was revised up on new data and higher demand. In second quarter 2020, global runs are expected to fall by 13.4 million b/d y-o-y, with 2020 average throughput down by 6.2 million b/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 million bbl (2.2 million b/d) to 2,961 million bbl. Total OECD stocks stood 46.7 million bbl above the 5-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 million bbl in April (1.8 million b/d), and crude inventories in Europe and Japan also rose by 3.1 million bbl and 3 million bbl, respectively. In April, floating storage of crude oil increased by 9.9 million bbl to 123.8 million bbl.
