Just after global oil demand crashed by 20 percent in April, analysts predicted that consumption would recover in the second half of 2020 and, supported by the OPEC+ production cuts and U.S. curtailments, would help the oil market to rebalance. By July, oil demand had recouped most of the losses incurred during the second quarter, but the recovery started to wobble with the resurgence of coronavirus cases in major economies, including in the United States, India, and Europe. High uncertainties about COVID-19 and the economic recovery started to weigh on the oil market and prices at the end of the summer when it became clear that 2020 would not be the year of oil market balance as the world still has a lot of excess crude and oil product stocks to process.
Stocks are drawing down in the world’s top petroleum consumer, the United States, but the pace is very slow. The market is moving toward rebalancing, but this process will likely take many months more and certainly more than initially expected.
A number of uncertainties put downward pressure on every oil demand forecast and on oil prices these days, including when an effective vaccine could be available to many people in many countries when economies recover, and whether consumer behavior has changed for good with work from home and virtual corporate events and conferences.
Oil market rebalancing also hangs on the future policies of the OPEC+ group, which, as-is, is planning to additionally taper the oil production cuts from 7.7 million bpd to 5.8 million bpd beginning in January 2021. This would come in Q1, in which oil demand in the world is typically at its weakest.
The weekly inventory reports in the world’s largest oil consumer and most transparent market, the United States, have provided some encouraging signs in recent weeks. Still, we are a long way off to a market balance because the record-high stocks that were built earlier this year need to be drawn down.
Total crude oil and product stocks in the U.S. have declined in 10 out of the last 11 weeks, Reuters market analyst John Kemp estimates, based on EIA data.
In the latest reporting week, the EIA reported a crude oil inventory build of 500,000 barrels through October 2, but a decline in gasoline and distillate stocks and a sizeable increase in production were the bullish highlights of the weekly inventory report.
At 492.9 million barrels, U.S. crude oil inventories were still about 12 percent above the five-year average for this time of year. The excess stocks, however, have shrunk from 19 percent above the five-year average in July. Total motor gasoline inventories were just below the five-year average for this time of year—the first time gasoline stocks fell below the five-year average since March.
The stock drawdown is already taking place, but the balancing will take longer than expected and could be derailed by stricter measures to combat resurging COVID-19 cases, especially in the flu season this fall and winter.
OPEC’s Secretary General Mohammad Barkindo said earlier this month that a vaccine would “significantly brighten” the demand/supply scenario, but until that time, “large uncertainties and risks will continue to destabilize the oil market and affect the pace of economic recovery.”
These large uncertainties could put the OPEC+ coalition in a bind, again, considering that it currently plans to ease the cuts by another 2 million bpd as of January 2021.
OPEC’s top producer and de facto leader, Saudi Arabia, is reportedly mulling over canceling the easing of the cuts, senior Saudi oil advisers told The Wall Street Journal this week.
If rising COVID-19 cases lead to more local lockdowns and reduced economic activity in the coming months, the OPEC+ alliance may have no other choice but to postpone the easing of the cuts if it wants to prevent another rise in oil stockpiles around the world amid stalled oil demand recovery.
“Despite expected inventory draws in the coming months, EIA expects high inventory levels and surplus crude oil production capacity will limit upward pressure on oil prices. EIA forecasts monthly Brent spot prices will average $42/b during the fourth quarter of 2020 and will rise to an average of $47/b in 2021,” the EIA said in its October Short-Term Energy Outlook this week.
