The summary of The IEA April Oil Report is available on IEA’s website: click here.
Crude Oil Demand
IEA statement :
Global oil demand is expected to fall by a record 9.3 mb/d year-on-year in 2020. The impact of containment measures in 187 countries and territories has been to bring mobility almost to a halt. Demand in April is estimated to be 29 mb/d lower than a year ago, down to a level last seen in 1995. For 2Q20, demand is expected to be 23.1 mb/d below year-ago levels. The recovery in 2H20 will be gradual; in December demand will still be down 2.7 mb/d y-o-y.
The expected fall in demand by IEA for 2Q20 is in line with our projections. The recovery in demand is likely to be protracted as the return to normal levels of economic activity around the world will take time, extending well over 2H20 and potentially into 1H21. Although, it is difficult at this stage to assess the medium and long term impact of the Covid-19 induced global economic and financial meltdown, it is likely to reduce oil consumption in a permanent manner from pre-crisis levels. The growth rate of global demand is also likely to be impacted going forward. We will come back on this important issue in later posts.
Crude Oil Supply
Global oil supply is set to plunge by a record 12 mb/d in May, after OPEC+ forged a historic output deal to cut production by 9.7 mb/d from an agreed baseline level. As April production was high, the effective cut is 10.7 mb/d. Additional reductions are set to come from other countries with the US and Canada seeing the largest declines. Total non-OPEC output falls could reach 5.2 mb/d in 4Q20, and for the year as a whole output may be 2.3 mb/d lower than last year.
The OPEC+ agreement put an end to the hectic price war initiated by Saudi Arabia in mid-March, following the fiasco of the OPEC+ Vienna Meeting. However, although the aforementioned oil production cut looks impressive and unprecedented, from a historical perspective, it is not enough to rebalance supply and demand in the short term as can been easily grasped from demand dynamics. In addition, the agreement lack efficient compliance procedures and it will not put an end to the ongoing fierce battle for the control of market share, especially in Emerging Asia (China, India, ASEAN) which is the principal driver of growth for global oil demand, as we explained earlier in this article.
Crude Oil Stocks
Early data show China’s implied stock build in 1Q20 at 2.1 mb/d, and US stocks increased by 0.5 mb/d. OECD data show that industry stocks in February fell by 35.4 mb to 2 878 mb as a draw for products more than offset a build in crude. Total OECD oil stocks stood 42.4 mb below the five-year average and, due to the weak outlook, now provide 79.2 days of forward demand coverage. In March, floating storage of crude oil increased by 22.9 mb (0.7 mb/d) to 103.1 mb.
If the transfers into strategic stocks, which might be as much as 200 mb, were to take place in the next three months or so, they could represent about 2 mb/d of supply withdrawn from the market.
Stocks build up have accelerated in April, especially in the United States as can been seen from the following chart showcasing US Commercial total crude oil stocks, crude oil stocks at the Cushing hub which is the delivery point for NYMEX WTI futures contracts, and total US gasoline stocks. A the current speed of accumulation, total storage capacity at the Cushing hub could be reached in May 2020. On a global level, the IEA estimates the implied stock build-up in H1 2020 at 12 mb/d.
President Trump touted the idea that the US Federal Government might lease the spare capacity at its SPR storage facilities – which stands around 75 million barrels as of mid-April 2020, out of a total holding capacity of 800 million barrels. This would alleviate some of the pressure on oil producers and oil traders. However, this will not solve the underlying supply & demand huge imbalance. Therefore, the ongoing build-up of stocks will continue to weigh on the oil market in the second half of the year.
The transfer of some of the huge oversupply that is still expected in May into strategic stocks might contribute to rebalance the oil market (cf. IEA statement above). But there remains much uncertainty regarding the actual size of that transfer and what could be expected in this regard from China, Japan and Korea over the next few months, let alone from the US where President Trump needs Congress funding autorisation to purchase additional oil in order to store in the SPR storage facilities. As mentioned above, it would be less costly for tax payers – and it would actually be beneficial – if the SPR spare capacities were leased to the oil producers, instead of purchasing this oil from them.
Refined Products Supply, Demand & Stocks
Refining throughput in 2020 is forecast to fall 7.6 mb/d y-o-y to 74.3 mb/d on sharply reduced demand for fuels. Global refinery intake is expected to plummet by 16 mb/d y-o-y in 2Q20, with widespread run cuts and shutdowns in all regions. Although refinery runs are falling, product stocks are still expected to build by 6 mb/d. In 2H20, refining activity will slowly recover as the global market moves into deficit.
The oversupply issue is moving from crude oil to refined products, as stocks are building-up quickly. This will increase the downward pressure on refining margins – so-called ‘crack spreads’ as could be seen from the curve of futures prices on the RBOB Gasoline/Brent Crack Spread (ICE).