IEA lowers demand estimates for third quarter
In the latest monthly Oil Market Report, the International Energy Agency (IEA) has lowered third-quarter 2020 oil demand estimates by 140,000 b/d overall due to poorer than expected deliveries.
This was offset by slightly higher estimates for the year’s fourth quarter. As a result, IEA’s 2020 forecast is unchanged at 91.7 million b/d, a decline of 8.4 million b/d from 2019. The 2021 forecast is also largely unchanged at 97.2 million b/d, a gain of 5.5 million b/d from 2020.
However, as IEA noted, the outlook remains fragile, as COVID-19 infections increase in many countries and governments tighten restrictions on movements. “This surely raises doubts about the robustness of the anticipated economic recovery and thus the prospects for oil demand growth.”
IEA’s global demand and supply estimates (including an assumption of full compliance with the OPEC+ agreement) imply a significant stock draw of 4 million b/d in the fourth quarter. While this is a large change, it is happening from record high levels. With the 1.9 million b/d increase in the OPEC+ production ceiling currently planned for Jan. 1, there is only limited headroom for the market to absorb extra supply in the next few months. Also, there is a risk that the demand recovery is stalled by the recent increase in COVID-19 cases in many countries.
“The uncertain outlook that could see the drawdown of stocks falter is reflected in the fact that physical prices have weakened, and this has brought down the front of the forward curve for Brent crude oil. The longer term offers little encouragement for the producers; the curve shows prices not reaching $50/bbl until 2023. Truly, those wishing to bring about a tighter oil market are looking at a moving target,” IEA said.
Demand
Global oil demand rose 3.4 million b/d month-on-month (m-o-m) in July, as coronavirus restrictions eased and summer holidays in the northern hemisphere supported a rise in transport fuel demand. Based on preliminary data, estimated demand gained a further 1.5 million b/d m-o-m in August.
Data for September remain scarce at the time of writing. Early indications point to higher work mobility in Europe and North America, and a significant demand increase in India following the end of the monsoon season and due to easing coronavirus restrictions.
However, a second wave of COVID-19 cases and new movement restrictions are now slowing demand growth. The recovery in passenger flights has also slowed, as governments have maintained travel restrictions. IEA therefore expects demand to rise by just 350,000 b/d m-o-m in September, the smallest such gain recorded since May, and with one country, India, responsible for the lion’s share of the gain.
By September, on a relative basis, gasoline, gasoil-diesel, and residual fuel deliveries are back to 96-97% of pre-crisis levels, but jet-kerosene consumption is only just over half of its previous level. Overall, oil demand has reached 94% of 2019 levels.
IEA expects oil consumption to recover by a further 1.7 million b/d by December vs. September levels, helped by additional gains in gasoil-diesel, gasoline but also jet-kerosene. Diesel and gasoline should be back to 98% of last year’s consumption by the end of the year, whereas jet will still be down by one third.
Fundamentals, pandemic
The economic outlook and the future spread of the virus, both key influences on oil demand, remain uncertain. There is growing evidence that the world’s economies are learning to live with the virus, despite the ongoing significant disruptions to mobility and trade. Official gross domestic product figures for second-quarter 2020, which were published in recent weeks, were not as weak as previously thought. As a result, several forecasters have recently increased economic outlooks for the rest of 2020 and into 2021.
In September and October, the reported number of new COVID-19 cases increased significantly in Europe. A smaller third wave is emerging in the US and the number of cases and deaths are rising significantly in Mexico. In OECD Asia, by contrast, the virus’ propagation appears to have stopped for now.
In non-OECD Asia, the number of daily cases is declining in India and in China only sporadic cases are being reported. The situation has stabilized in Saudi Arabia and South Africa and is improving in Brazil and Iraq. By contrast, cases are increasing in Argentina, Iran, Russia, Ukraine, and the UAE. In most countries, the number of deaths attributable to COVID-19 has not increased as fast as cases and containment measures remain localized.
Supply
Global supply fell 600,000 b/d to 91.1 million b/d in September, down 8.7 million b/d on 2019, as the UAE slashed output and maintenance cut flows in the North Sea and Brazil, more than offsetting a US rebound from August’s hurricane shut-ins.
The sharp supply cut from the UAE helped to boost overall OPEC+ compliance to 103% in September versus 98% in August, with all major producers apart from Russia pumping at or below their targets.
For October, a strike in Norway and Hurricane Delta in the US Gulf briefly knocked out substantial volumes, but any losses are likely to be offset by further gains from Libya, should its cease-fire hold, and if OPEC+ members produce at their agreed targets.
In fourth-quarter 2020, world supply may rise towards 92 million b/d from 91.3 million b/d in the third quarter if Libyan output continues to recover and assuming OPEC+ produces to its target. Of the top three producers, the US is expected to decline by 160,000 b/d vs. third-quarter 2020 while Saudi Arabia and Russia add more than 300,000 b/d between them.
Total non-OPEC supply is set to drop by 2.6 million b/d in 2020 before recovering by 400,000 b/d in 2021.
Refinery, stocks
Strong gains in global refinery throughput in July and relatively stable runs in August and September came at the cost of steep falls in margins. In fourth-quarter 2020, demand and refining forecasts imply large product stock draws, but refinery margins may not get an immediate boost. In 2021, runs will rebound only partially, to levels last seen in 2015.
In August, OECD industry stocks fell by 22.1 million bbl (0.71 million b/d) m-o-m to 3,194 million bbl and were 209.1 million bbl above their 5-year average. Preliminary data for September show that crude stocks in the US and Japan fell by 6.5 million bbl and 1.8 million bbl, respectively, while those in Europe rose by 3.3 million bbl. Implied global stocks fell by 2.3 million b/d in third-quarter 2020 and are projected to fall by 4.1 million b/d in fourth-quarter 2020. In September, volumes of crude oil held in floating storage fell sharply by 70 million bbl (2.33 million b/d) to 139.1 million bbl.
Crude futures
Crude futures fell in September vs. August, partly reflecting weaker financial markets. ICE Brent fell by $3.15/bbl and NYMEX WTI by $2.76/bbl m-o-m to $41.87/bbl and $39.63/bbl, respectively. Prices saw a 10% early-October jump ahead of Hurricane Delta. Physical prices e.g. North Sea Dated, remained below the futures front month reflecting a well-supplied prompt market. Freight rates remain at historically weak levels as tanker activity sits at a near 10% deficit to 2019 levels.
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