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Oil Market Report - April 2020


An unprecedented global oil demand shock and a massive sell-off in global oil markets accompanied by the breakdown of the OPEC+ agreement and the start of a new oil war between Saudi Arabia and Russia pushed crude oil futures prices to more than 18-year lows in late March 2020, while economic stimulus plans from governments and central banks, as well as some recovery in equity markets, failed to calm investor worries and to limit the oil price decline. Both international futures benchmarks (ICE Brent and NYMEX WTI) fell for three consecutive months and tumbled in March 2020 by a hefty 39% and 40% in monthly terms, or $21.75 and $20.09, respectively, the steepest declines since October 2008. The fast spread of COVID-19 and the sharp increase in the number of new infections have led countries across the world to implement drastic measures to contain this health crisis. Most countries, including the major economies, have imposed lockdowns, travel restrictions and social distancing, which caused an abrupt slowdown in global economic activity and a historic oil demand contraction, particularly in transportation fuels like jet fuel, gasoline and diesel.

However, the situation on the global oil market changed dramatically in the first decade of April 2020 as major oil producers in all the regions of the world faced with unprecedented difficulties in selling previous amount of crude oil to customers and released that the Covid-19 linked demand shock is too serious to ignore it and continued the price war.

So, on April, 5 oil producers in the OPEC+ group agreed to cut output by an initial 9.7 mln bbl / d versus their agreed baseline, effective 1 May. Moreover, an extraordinary meeting of energy ministers from G20 and other countries took place on April, 10. Those present offered their support for the efforts of the OPEC+ countries to stabilize the oil market and, in some cases, discussed output cuts that would take place immediately or over time. All these initiatives had led to a rapid spur of crude oil price in the first 10 days of April with the ICE Brent nearest contract growth above $36.0 / bbl, or more than 60% since lows that were recorded in late of March. But the effect was not prolonged over time, so in the middle of April crude benchmarks surrendered the most parts of the gains with the ICE Brent falling again below $30.0 / bbl threshold.

The OPEC+ and G20 initiatives will impact the oil market in three ways. First, the OPEC+ production cut in May to reach the baseline will actually be 10.7 mb/d and not 9.7 mb/d, as April production was high. This will provide some immediate relief from the supply surplus in the coming weeks, lowering the peak of the build-up of stocks. Second, four countries (China, India, Korea and the United States) have either offered their strategic storage capacity to industry to temporarily park unwanted barrels or are considering increasing their strategic stocks to take advantage of lower prices. This will create extra headroom for the impending stock build-up, helping the market get past the hump. Third, other producers, with the United States and Canada likely to be the largest contributors, could see output fall by around 3.5 mb/d in the coming months due to the impact of lower prices, according to the recent IEA estimates.

Total crude oil output by the OPEC as a whole in March 2020 finally stopped to decline and demonstrated the 1st positive monthly rate of change over last 5 month as the sudden breakdown of the OPEC+ agreement on March, 6 had led to a new oil war between Russia and Saudi Arabia. Despite to the fact that the old agreement to curb oil output expired only on April, 1, there was no more any reason for Saudi Arabia and its allies not to cheat and produce less crude oil. However, the monthly growth of cartel’s output in the month under review was not as significant as it could be as only Saudi Arabia really increased its production rate. So, the cartel as a whole in March 2020 produced just 150 thsd bbl / d or 0.5% mom more crude oil than it did in February 2020. It should be noted that despite to the positive monthly growth of output, OPEC production in general remained at a very low level by historical standards, rather close to the minimum level since May 2009. So, it is no wonder that compared to one year ago level, the volume of crude oil production by the OPEC in March 2020 was lower by very substantial 2.62 mln bbl / d or shocking 8.5% yoy.

Total oil production around the globe in February 2020 rose marginally by 0.2% mom or 180 thsd bbl / d in the contrast to the volume of January 2020, in accordance to the EIG data. On a year-over-year basis, total global crude oil production in the month under review also went up, but more significantly relative to the monthly rate, and increased by 755 thsd bbl / d or 0.8% yoy. The most substantial growth of crude oil production among non-OPEC states in absolute terms in February 2020 relative to January 2020 again took its place in Canada, where an output of oil grew up by another 3.1% mom or 137 thsd bbl / d.  The most considerable growth in relative terms in February 2020 again was recorded in Norway, where a production rose by another 7.4% mom or 121 thsd bbl / d. The UK and Australia were also among the non-OPEC states that pumped more oil in the month under review than they did in the previous month. Monthly growth rates in these two countries were equal to +4.0% mom or +43 thsd bbl / d and to +3.4% mom or +13 thsd bbl / d respectively.

Total crude oil production in the USA in March 2020 was flat relative to the volume of the previous month and remained slightly above the threshold of 13.0 mln bbl / d. It is worthwhile to remind that this is the highest level or crude oil production in the USA over the whole history of observations. From a year-over-year standpoint, crude oil production in the USA in March 2020 was considerably higher than it was one year ago in March 2019. The annual rate of growth was equal to 1.05 mln bbl / d or solid 8.8% yoy, the same as in the previous month. Production of shale oil in the USA in March 2020 decreased marginally, in compliance with the most recent data provided by Rystad Energy. Monthly rate of decline was equal to 108 thsd bbl / d or 1.2% mom in compare to the value of the previous month. However, in comparison to one year ago figures, a total production of shale oil in the USA in March 2020 was considerably higher by 10.9% yoy or nearly 0.9 mln bbl / d in absolute terms.

The IEA again revised down its assessments of global demand for oil for the current year within the period under report, as the situation with Covid-19 spreading around the world has worsened even more in late March and the first half of April. According to the new shocking numbers that were released in the IEA OMR for April 20, total global oil demand in 2020 is expected to fall by a record 9.3 mln bbl / d year-on-year. The impact of containment measures in 187 countries and territories has been to bring mobility almost to a halt. Demand in April 2020 is estimated to be 29 mln bbl / d lower than a year ago, down to a level last seen in 1995, followed by another significant year-over-year fall of 26 mln bbl / d in May. In June, the gradual recovery likely begins to gain traction, although demand will still be 15 mln bbl / d lower than a year ago. For 2Q20, demand is expected to be 23.1 mln bbl / d below year-ago levels. The recovery in 2H20 will be gradual; in December demand will still be down 2.7 mln bbl / d yoy.

Total commercial stocks of oil and oil products in OECD states in January 2020 increased by 27.8 mln bbl or 1.0% mom in compare to the volume of December 2019, pursuant to the preliminary IEA data. The overall inventories grew up to the highest level over last 4 months. However, a positive monthly dynamic was observed only in stocks of refined oil products, which volume built up by 38.6 mln bbl or 2.6% mom in contrast to the level of the previous month. The same time, the inventories of crude oil in OECD countries decreased in January 2020 by 14.6 mln bbl or 1.3% mom for the 2nd month in a row.

Total commercial inventories of crude oil in the USA in March 2020 continued to climb up for the 3rd month in a row and went up by 25.1 mln bbl or very significant 5.6% mom relative to the volume of February 2020. By the same token, total commercial inventories of crude oil in the USA in the month under review rose by 23.3 mln bbl or material 5.2% yoy in compare to the volume of March 2019. The overall volume of commercial inventories in the USA reached the highest level over last 10 month (as of the end of March), while monthly rate of growth was the highest one over recent 3 years, as the USA started to implement measures to contain Covid-19 spreading around the country since the middle of the month. Inventories of crude oil in the Cushing storage in Oklahoma (the basis for NYMEX WTI crude oil futures) in March 2020 expanded, but the monthly rate of growth here was even higher and equal to 5.6 mln bbl relative to the volume of the previous month or shocking 15.2% mom. Meanwhile, due to the fact that this year has started with a rather low level of crude oil inventories in the Cushing storage close to 5-year lows (at least for winter months), the volume of stocks in the Cushing storage even by the end of March was lower than the average level over 5 last years.

Total floating inventories of crude oil worldwide increased in March 2020 relative to the level of the previous month by 1.5 mln bbl, or 2.7% mom, for the 4th month in a row and reached the highest level since October 2019. It is also worthwhile to note that the current level of floating stockpiles (as of the end of March) was very close to the highest level of the indicator over last 4 years for this month of a year. As for a year-over-year dynamic, then total volume of crude oil that held of floating storages in March 2020 also demonstrated a positive rate of growth. To be more specific, the volume of floating inventories in the month under consideration was 12.0 mln bbl or more than 26% yoy higher than it was one year ago, in March 2019.

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