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Global oil demand will average 92.1 million b/d in 2020, down by 7.9 million b/d versus 2019, the US International Energy Agency (IEA) forecast in its July Oil Market Report—a slightly smaller decline than forecast in the last report. Meantime, the agency highlighted uncertainty about the forward path for global oil demand due to the re-imposition of social distancing measures due to COVID-19 spread in key regions.
“While the oil market has undoubtedly made progress since ‘Black April’, the large, and in some countries, accelerating number of OVID-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,” IEA said.
“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 confirms that the worst of the demand destruction was in the first half of the year when demand fell by 10.75 million b/d. New data also shows that the decline in second-quarter 2020 was less severe than expected. Global oil demand fell by 16.4 million b/d year-on-year in the quarter as lockdowns were imposed to combat the COVID-19 pandemic. Demand rebounded strongly in China and India in May, increasing by 700,000 b/d and 1.1 million b/d month-on-month, respectively.
For the second half of the year, IEA expects an improvement in the level of decline to 5.1 million b/d. For the whole 2020, IEA now estimates that global oil demand will average 92.1 million b/d, down by 7.9 million b/d versus 2019, a slightly smaller decline than forecast in the last report.
For 2021, IEA has made some minor adjustments to its outlook and demand will be 97.4 million b/d. Average demand in 2021 will be 2.6 million b/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 million b/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 million b/d more than required, reducing OPEC crude output to its lowest point in nearly 3 decades.
This solid performance by the OPEC+ group has been supplemented by substantial market-driven cuts, mainly in the US. Total US oil production fell by nearly 1 million b/d in April versus March and IEA estimates that May and June will see further month-on-month declines of 1.3 million b/d and 500,000 b/d, respectively.
However, in the second half of the year supply could start to grow, IEA said. “We see US production bottoming out and then slowly growing and OPEC+ countries are set to ease their existing cut by around 2 million b/d from August. Also, by the end of the year Libya’s oil production could be as much as 900,000 b/d higher than it is today.”
If the OPEC+ cuts stay in place as agreed, global supply could fall by 7.1 million b/d in 2020 before seeing a modest recovery of 1.7 million b/d next year, IEA forecasts.
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 second quarter. In China, throughputs in June were estimated at a record level of nearly 14 million b/d. Global refinery runs are forecast to fall by 6.4 million b/d in 2020 to 75.1 million b/d and increase by 4.7 million b/d in 2021.
OECD industry stocks rose by 81.7 million bbl (2.64 million b/d) to 3,216 million bbl in May, rising by 2 million b/d since the end of 2019. In the US, preliminary data for June show that commercial stocks built by 24.7 million bbl (800,000 b/d), led by products. In June, floating storage of crude oil fell by 34.9 million bbl from its all-time high in May to 176.4 million bbl. A tightening crude market balance and a flatter forward price curve 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.
