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Oil Market Report - March 2020


Crude oil prices ended February 2020 sharply lower with both ICE Brent and NYMEXWTI showing monthly declines of more than 12% to reach their lowest monthlyvalues in almost 2.5 years as the rapid spread of Covid-19 in China and several othercountries raised investors’ concerns about the impacts on the global economy and oildemand, and triggered a sharp sell-off in markets amid uncertainties on the extent ofdemand destruction and worries that this health crisis might evolve into a pandemic.

However, the fall of crude oil prices in February 2020 was just a prelude to a realcollapse of a global oil market that occurred within two first decades of March 2020.In addition to fears of dramatic oil demand destruction due to strict quarantinemeasures in many countries to overcome Covid-19 rapid spreading, the OPEC+agreement to curb oil output to balance the oil market crumbled to dust. On a regularOPEC meeting in Vienna on March, 5 Saudi Arabia proposed to extend production cutswithin the OPEC+ states by another 1.5 mln bbl / d till the end of 2020 to deal with a recordoil demand contraction over decades. But the new agreement was completely rejected byRussia on the next day, and all hell broke loose. Next weekend, Saudi Arabia claimed thatit will pump as much oil as possible since April, 1, when the old agreement is expired, andis ready to ramp up its production level to over 12 mln bbl / d. Moreover, Saudi Arabiastarted to provide substantial discounts on its crude oil and raised export volumes foraccount selling from inventories. So, the 4th oil war has begun!It is little wonder, that on the next trading day after failed OPEC+ meeting, on 9 March,crude oil futures prices tumbled about 25% in one trading session, recording their biggestdaily decline in nearly 30 years, with ICE Brent and NYMEX WTI settling respectively at$34.36/b and $31.13/b. But even these levels weren’t a trough of the current downturn onthe oil market. A crash of global financial markets within following 10 days, self-fueling withmargin calls, forced position liquidation and severe shortage of dollar liquidity in the systemresulted in even more severe tumble of crude oil prices. ICE Brent prompt pricecollapsed to as low as $23.05/b on 18 March, the level not seen since spring of 2003!NYMEX WTI 1M futures deepen below $20.0/b, while Canadian heavy oils crushedbelow $10.0/b threshold!

Total crude oil output by the OPEC as a whole in February 2020 continued to godown and decreased modestly by another 480 thsd bbl / d or 1.7% mom relative tothe level of the previous month as the cartel continued to curb output in attempt tobalance the oil market and oil production in Libya nearly collapsed. Monthly rate ofcrude oil production in Libya collapsed to just 150 thsd bbl / d, nearly 1.0 mln bbl less incompare to two month ago level as oil export from main Libyan export terminals continuedto be blocked by forces under the control of general Haftar. The monthly volume of cartel’scrude oil production in the month under review dropped down below the threshold of 28.0mln bbl / d and sank to the new lowest level since May 2009. Compared to one year agolevel, the volume of crude oil production by the OPEC in February 2020 was lower byastonishing 2.77 mln bbl / d or severe 9.0% yoy.

Total crude oil production in the USA in February 2020 continued to grow andexpanded by another 50 thsd bbl / d or 0.4% mom in compare with the previousmonth. The month under review has become the 7th month in a row of growing oil output inthe USA. From the year-over-year standpoint, crude oil production in the USA in February2020 was considerably higher than it was one year ago in February 2019. The annual rateof growth was equal to 1.05 mln bbl / d or solid 8.8% yoy.

A production of shale oil in the USA in February 2020 rose by another 100 thsd bbl / d or 1.0% mom in compare tothe value of the previous month, in compliance with the most recent data provided byRystad Energy. In comparison to one year ago figures, a total production of shale oil in theUSA in February 2020 skyrocketed by astonishing 18.2% yoy or more than 1.5 mln bbl / din absolute terms.

The IEA provided its assessments of a demand for oil worldwide in the 4th quarter of2019. According to the data, total demand for oil around the globe in the 4th quarterof 2019 continued to grow both in quarterly and in yearly terms. Relative to the level ofthe previous quarter of 2019, global demand for oil increased by 350 thsd bbl / d or modest0.3% qoq. However, in compare to the level of the 4th quarter of 2018, the demandexpanded by nearly 1.7 mln bbl / d or healthy 1.7% yoy. It worthwhile to mention that globaldemand for in the quarter under review reached new historical maximum of 101.2 mln bbl /d. Non-OECD states as a whole provided the lion share of overall global demand for oilgrowth, while oil demand in OECD countries was soft and even declining in quarterly terms.To be more specific, cumulative oil demand in OECD group of states in the 4th quarter of2019 contracted by 210 thsd bbl / d or 0.4% qoq relative to the 3rd quarter of 2019. Incompare to one year ago figures, the indicator was nearly flat and demonstrated marginalgrowth by 60 thsd bbl / d or 0.1% yoy. By the same token, demand for oil in non-OECDgroup states in the 4th quarter of 2019 expanded by 550 thsd bbl / d or 1.0% on quarterlybasis and by 1.62 mln bbl / d or impressive 3.1% on yearly basis.

The same time, the IEA now expects that global oil demand will fall in 2020 – the firstfull-year decline in more than a decade – because of the deep contraction in China,which accounted for more than 80% of global oil demand growth in 2019, and majordisruptions to travel and trade. According to the agency, the visible decline in transport,industrial and commercial activity in the 1st quarter of 2020 points to a massive drop inglobal oil demand of 2.5 mb/d compared with the first quarter of last year. This includes anestimated annual decline of 4.2 mb/d in February, of which 3.6 mb/d was in China. In theIEA base case, China suffers the most with a year-on-year drop in oil demand of 1.8 mb/din the 1st quarter as factories shut down and large-scale confinement measures curbtransportation. In the 2nd quarter, as the situation in China improves, demand deteriorates insome other large economies, such as Japan and Europe. Overall, global oil demand in the2nd quarter is only slightly lower than a year ago. As we move through the second half ofthe year, demand picks up, growing by 1.1 mb/d compared with the second half of 2019.For 2020 as a whole, the magnitude of the drop in the first half leads to a decline in globaloil demand of around 90,000 barrels per day, the first annual fall since 2009.

Total commercial stocks of oil and oil products in OECD states as a whole inDecember 2019 was nearly flat compared to November 2019, according to the IEAdata, and marginally increased by 3.7 mln bbl or 0.1% mom. All the growth of theoverall figure was achieved due to growth of inventories of refined oil products, while totalstocks of crude oil in the month under review declined relative to the previous month. Inparticular, total inventories of processed oil products in December 2019 expanded by 38.4mln bbl or 2.7% mom, while total inventories of crude oil contracted by 21.9 mln bbl or 2.0%mom within the same period of time.

Total commercial inventories of crude oil in the USA in February 2020 continued toexpand for the 2nd week in a row and went up by another 9.1 mln bbl, or 2.1% mom,relative to the volume of January 2019. By the same token, total commercial inventoriesof crude oil in the USA in the month under review decreased by 1.7 mln bbl or humble 0.4%yoy in compare to the volume of February 2020. Along with dynamic of total commercialcrude oil stocks in the USA, inventories of crude oil in Cushing storage in Oklahoma(the basis for NYMEX WTI crude oil futures) in February 2020 expanded, but the rateof growth was minor and equal to 0.5 mln bbl relative to the volume of the previous month or 1.3% mom. By the same token, the inventories of crude oil in Cushing inFebruary 2020 was essentially lower than one year ago, in February 2019, annual rate ofdecline was equal to significant 9.5 mln bbl or impressive 20.3% yoy.

So, the volume of oilstocks in Cushing in February 2020 again was deeply below the average level for thismonth of a year over last 5 years.Total floating inventories of crude oil worldwide decreased by 2.5 mln bbl, or 4.3%mom, in February 2020 after reaching a maximum level over last 3 months in January2020. The volume of stocks by the end of the month felt to 56.3 mln bbl. However, a currentlevel of global floating stocks in the month under review was higher than an averageFebruary level of stocks over last 3 years. As for the year-over-year dynamic, total volumeof crude oil that held of floating storages in February 2020, on the contrary, demonstrated asolid rate of growth. To be more specific, the volume of floating inventories in the monthunder consideration was 10.7 mln bbl or nearly 24% yoy higher than it was one year ago inFebruary 2019.

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