Oil prices headed south over the last week and this morning as concerns of a second wave of COVID19 resurfaced. In the United States, the confirmed number of coronavirus cases exceeded the 2 million mark last Wednesday while more than 117 thousand deaths were recorded over the past week.

There are expectations of new lockdown measures which could impact recovering gasoline demand over the summer. In previous reports, we have highlighted factors that could add uncertainty to demand recovery in 2020 and beyond including growing caution over a second wave of infections, threats to pre-crisis oil consumption patterns, and jet fuel demand which is set to lag fuel’s recovery into 2021. The Flightradar website shows a rebound in aviation activity, although at a slow rate, with the number of flights slightly above 40 thousand compared to more than 100 thousand flights a year ago.

The EIA last week report showed that oil inventories rose by 5.7 million barrels over the past week, and this rise is slowed by rising SPRs by 2.2 million barrels despite declining production by 100 thousand bbl/d and rising refinery throughput by 178 thousand bbl/d w/w.

The US drilling activity continues to decline, yet at a slower speed, with 7 rigs reported to have reached 199 active oil rigs with most of the reported decline is in the Permian basin. Despite falling prices, money managers continued to increase their net long positions by 1,238 w/w in WTI contracts reaching 381,345, a twenty-two-month high, while also increasing their net long position, in Brent contracts by 12,056 w/w to stand at 183,583 contracts, fourteen-week high, on expectations of higher prices in the months ahead. Statements from the US treasury secretary to exclude the possibility of re-shutting the economy provided much support to the wall street, leading to Brent rebounding on Friday evening to settle at $38.73, down by 8.44% w/w, while WTI closed at $36.56, down by 7.56% w/w.

OPEC+ Meetings

Declining prices were also driven by the fact that extra cuts from the GCC will not continue beyond June, and this was confirmed by the energy minister of Saudi Arabia during the OPEC+ a press conference last Saturday. Yet, the Saudi Energy Minister highlighted that OPEC+ cuts will be deeper in June, July and August as some countries will have to make up their missing targets.

OPEC+ JMMC meeting which has been decided to take place on a monthly basis, is expected to take place on the 18th of June, this week on Thursday. It will be vital to monitor the new impact of the monthly JMMC on oil markets in the months ahead. Generally, we expect OPEC+ to send positive signals to enhance the market stability, yet this will be conditional on the reported compliance from the JMMC meetings. The OPEC monthly oil market report is due to be released this week, June 17th, showing production of OPEC member countries for the month of May, one day before the JMMC meeting.

It is likely that OPEC+ will continue to follow the month-to-month approach as the markets continue to show volatility with rising demand recovery uncertainty. It is too early to know if cuts will be extended over August since market conditions, particularly, demand figures, could drastically change over the next weeks.

Libyan oil production has ceased again as tensions with armed militias over the fields continue, severely affecting the supply stability in the country. Even in the case of returning Libyan supplies, we expect the impact on OPEC+ to be minimal because of expected deeper cuts reaching 3.3 mbbl/d while the Sharara field will produce only 0.3 mbbl/d at its full capacity.

EIA STEO And Our Forecast

The EIA has reduced its demand outlook in its STEO released last week to 8.3 million bbl/d, down by 0.2 million bbl/d from the previous forecast, while predicting an increase of 7.2 million bbl/d in 2021, which is down by 1.26 million bbl/d from its previous forecast. The EIA also expects global demand in Q2-2020 to stand at 83.8 million bbl/d, down by 16.6 million bbl/d from the previous year. Our forecast for global demand growth this year remains the same at -10.12 million bbl/d which compares to a newly announced forecast by the Bank of America predicting a decline by 10 million bbl/d in 2020. Furthermore, our forecast for demand decline in Q-2 2020 is seen at 79.33 million bbl/d, 4.47 million bbl/d less than the EIA forecast. Our data also shows that there are currently more than 2.3 billion barrels in global stocks compared to 1.3 billion barrels a year ago.

The EIA now expects global oil inventories will begin declining in June, a month earlier than previously forecast, while our forecast shows that could happen for the US inventories while withdrawal from other global inventories is set to start in July. Current demand uncertainty, slowing price recovery, and rise inventories support our hypothesis. The EIA expects the US production to continue to decline throughout 2020 and beginning of 2021 before it rebounds towards the end of 2021 with average production of 11.6 mbbl/d in 2020, and 10.8 million bbl/d in 2021. This represents a decline by 0.7 million bbl/d, and 0.8 million bbl/d y/y, in 2020 and 2021, respectively, according to the EIA. Yet we predict that the US production will average 11 million bbl/d in 2020, down by 1.8 million bbl/d y/y, and before it slightly rebounds in the second half of 2021. The typical period for production change is around six months after changes to oil prices. Yet, this period has been significantly shortened under the current market conditions as many producers have already curbed their production and reduced their capital spending and drilling activities in response to lower prices.

Market behavior over the past week has shown that the path to a V-Shaped price recovery may not be as smooth as previously thought. At CMarkits we see the recovery to be largely be affected by (i) levels of inventories and their withdrawal (ii) control of a second wave of COVID19 (iii) rising US dollar index (iv) slowing aviation and (v) change in consumer behavior.

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