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Oil Market Report - January 2020

EXECUTIVE SUMMARY

In January 2020, crude oil prices erased all the gains accumulated over the previoustwo months, with ICE Brent falling at the end of January, to reach its lowest dailylevel in three months. This was on the back of easing geopolitical tensions in the MiddleEast later in the month and the risk of slowing oil demand growth in the coming monthsamid growing concerns about the Coronavirus outbreak in Wuhan and the risk of itspreading throughout China and to other countries.

In early February 2020, a downturnon crude oil market continued, the prices kept on to slide down with a rapid pace tofinally reach a low on February, 10 with a certain upward bounce to follow. So, theCoronavirus outbreak in China has significantly affected oil prices and brought about amarket sell-off. To be more precise, the ICE Brent first month futures tumbled by nearly26% from a peak of $71.75 at January, 8 to a throw of $53.11 at February, 10.

To deal with a sell-off on oil market the Joint Technical Committee (JTC) of oilproducing states within the OPEC+ group after an emergency meeting hasrecommended on February, 8 to extend voluntary production adjustments under the‘Declaration of Cooperation’ process until the end of 2020 and to proceed with an additionaladjustment until the end of the second quarter. According to the JTC, "the coronavirusepidemic is having a negative impact on economic activities, particularly on thetransportation, tourism and industry sectors, particularly in China, and also increasingly inthe Asian region and gradually in the world".

However, more serious measures tostabilize the market, such as an additional cut of production by another 600 thsd bbl /d, was refused by Russia, so the JTC exclude them from its final recommendations.Despite to a rather weak OPEC+ response to a market turmoil, crude oil prices finally founda ground below the level of $55.0 per bbl (the ICE Brent) soon after the end of the JTCemergency meeting as the Coronavirus fears began to ease on better epidemic data fromChina authorities.

Total crude oil output by the OPEC as a whole in January 2020 contractedsignificantly by another 1.0 mln bbl / d or 3.6% mom. The monthly volume of cartel’scrude oil production dropped down below the threshold of 29.0 mln bbl / d and sankto the lowest level since May 2009. To a certain degree, so crucial fall of crude oilproduction within the cartel was linked with Ecuador’s decision to cancel itsmembership in the OPEC, effective January 1, 2020. The main reason behind theEcuador’s decision to leave the cartel is fiscal needs that made further oil production cutsunpalatable, according to the country’s energy minister.

Excluding Ecuador’s swing, the main cutback in crude oil production within the OPECwas recorded in Libya, where an output of crude oil tumbled by 320 thsd bbl / d or28.8% mom as oil export from main Libyan export terminals was blocked by forcesunder the control of general Haftar. According to Libyan state oil company NOC, if Libyanexports are halted for any sustained period, storage tanks will fill soon and production willslow to 72 thsd bbl / d, the level not seen since 2011. Besides Libya, almost all members ofthe OPEC recorded falling crude oil production in monthly terms in January 2020, exceptfor Venezuela and Nigeria.

Total oil production around the globe in January 2020 contracted by 0.6% mom or587 thsd bbl / d in compare to the volume of the previous month, according to thedata of the EIG. Although relative to one year ago level, the production, on thecontrary, rose by 0.8% yoy or 815 thsd bbl / d. Total oil production by the non-OPECstates within the month increased just moderately by 0.2% mom or nearly 138 thsd bbl / don monthly basis, but rose significantly by solid 5.0% yoy or nearly 3.1 mln bbl / d in yearly terms. The most substantial growth of crude oil production among non-OPEC states inabsolute terms in January 2020 relative to the previous month took a place in Canada,where an output of crude oil grew up by 3.4% mom or 152 thsd bbl / d., and Norway, wherea production of crude oil rose by impressive 8.2% mom or 136 thsd bbl / d. The USA, theUK, Russia, Malaysia and China in January 2020 were also among the non-OPEC statesthat pumped more oil than they did in the previous month. On the other hand, Argentina,Brazil and Mexico in January 2020 were the states with falling monthly output of crude oil.

Crude oil production in the USA in January 2020 continued to grow for the 5th monthin a row and extended by another 125 thsd bbl / d or 1.0% mom in compare with theprevious month. The level of crude oil production in the USA has reached new historicalmaximum, slightly below the threshold of 13.0 mln bbl / d. From the year-over-year point ofview, crude oil production in the USA in January 2020 was considerably higher than it wasone year ago in January 2019. The annual rate of growth was equal to 1.125 mln bbl / d orimpressive 9.5% yoy.

Total production of shale oil in the USA in January 2020 rose by another 45 thsd bbl /d or 0.5% mom in compare to the value of the previous month. An output of shale oil in theUSA also had reached a new historical maximum of 9.29 mln bbl / d and remained abovethe threshold of 9.0 mln bbl / d for the 4th month in a row. In comparison to one year agofigures a total production of shale oil in the USA in January 2020 expanded by impressive12.1% yoy or nearly 1.0 mln bbl / d in absolute terms. A share of shale oil in cumulativecrude oil output in the USA in January 2020 decreased by 0.3 p.p. to 71.9%. The wholecontribution to an overall shale oil production growth in the USA in January 2020 was madeby the Permian basin that continued to be the main engine of shale oil boom in the country.

The IEA sharply cut its global oil demand growth forecast for 2020 year. According tothe agency, global oil demand has been hit hard by the novel coronavirus (Covid-19) andthe widespread shutdown of China’s economy.

So, global demand is now expected tofall by 435 thsd bbl / d on year-over-year basis in 1Q20, the first quarterly contractionin more than 10 years. Also, the agency has cut its 2020 growth forecast by 365 thsdbbl / d to 825 thsd bbl / d. And this is the lowest level since 2011. Lower-than-expectedconsumption in the OECD trimmed 2019 growth to 885 thsd bbl / d. The coronavirusoutbreak has also led the IEA to revise down the outlook for global refinery runs. Chinesecrude throughputs for 1Q20 have been cut by 1.1 mln bbl / d and are now expected tocontract by 0.5 mln bbl / d year-on-year. As a result, global runs are forecast to expand byjust 0.7 mln bbl / d in 2020.

The OPEC also revised down its global oil demand estimates for 2020 in its monthlyreport for February 2020. Thus, global oil demand growth in 2020 was revised downby 0.23 mln bbl / d from the previous month’s assessment. With this, global oil demandis now forecast to grow by 0.99 mln bbl / d and average 100.73 mln bbl / d for 2020, withOECD oil demand growing by 0.01 mln bbl / d in 2020, while non-OECD oil demand isgrowing by 0.98 mln bbl / d due to the outbreak of the Coronavirus in China during 1H20.

Total commercial stocks of oil and oil products in OECD states in November 2019continued to slide and marginally decreased by 2.9 mln bbl or 0.1% mom. So, thedownward tendency in total commercial stocks of crude oil and oil products has prolongedover 3 months in a row. However, negative monthly dynamic was observed only in volumesof refined oil products inventories, while crude oil stocks in OECD states during the monthunder review went up. To be more specific, total inventories of processed oil products inNovember 2019 contracted by 7.3 mln bbl or 0.5% mom, while total inventories of crude oilrose by 10.0 mln bbl or 0.9% mom within the same period of time.

Total commercial inventories of crude oil in the USA in January 2020 again reversedto the North and expanded by 5.1 mln bbl or 1.2% mom relative to the volume of December 2019. Meanwhile, on yearly basis total commercial inventories of crude oil in theUSA in the month under review demonstrated the opposite dynamic and contracted by 10.9mln bbl or 2.5% yoy in compare to the volume of January 2019.

Along with the dynamicof total commercial crude oil stocks in the USA, inventories of crude oil in Cushingstorage in Oklahoma (the basis for NYMEX WTI crude oil futures) in January 2020also increased moderately by 0.4 mln bbl or 1.1% mom relative to the volume of theprevious month. So, the figure continued to be significantly below the average level for thismonth of the year over last 5 years. The gap widened to nearly 25%.

Total floating crude oil inventories worldwide increased by 9.1 mln bbl or 16.5% momin January 2020 after very significant growth during the previous month. According tothe Vortexa Ltd. data, the indicator again returned back above threshold of 60.0 mln bbl.Also, the current level of global floating stocks rose materially above an average level forthis month of a year over last 4 years. As for the year-over-year dynamic, a total volume ofcrude oil that held of floating storages in January 2020 likewise demonstrated a strong rateof growth. To be more precise, the volume of floating inventories in the month underconsideration was 17.3 mln bbl or nearly 37% yoy higher than it was one year ago inJanuary 2019. However, it should be mentioned that the numbers on floating storagesvolumes are highly volatile to make any longer-term forecasts or predictions.

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