In these testing times nothing is definite, nothing is certain, nothing is set in concrete, nothing is guaranteed, and everything changes on a whim. The latest Monthly Oil Market Report published by OPEC yesterday paints an encouraging supply-demand picture for the second half of the year, at least when it is set against last month’s assessment. To put it simply, the oil balance for the first half deteriorated as the impact of the coronavirus on the global economy is more severe than originally anticipated. The second half of 2020, on the other hand, sees some significant improvement, according to the research arm of the organization.

To begin with the past and present the January-June period is set to register a sizable growth in global and regional oil inventories. The first quarter of the year showed a supply surplus of 7.2 mbpd or 648 million bbls over the period globally. OECD inventories built by nearly 100 million bbls in 1Q and broke above the 3 billion bbls mark. The incumbent quarter is estimated to be even more depressing. The call on OPEC is forecast to drop to 16.77 mbpd, a quarterly decline of 4.3 mbpd. Independent tanker trackers and consultants put the organization’s output level at 30.412 mbpd, some 1.8 mbpd higher last month than in March as the price war went full throttle. (On a side note, despite the increase in OPEC’s output in April the daily revenue from petrodollars nearly halved from $971 million to $537 million as prices crashed.) The new supply agreement came into effect at the beginning of the current month. In case of decent compliance OPEC might be able to bring the average 2Q production down to 25 mbpd. Under this assumption global oil stocks would increase by 8.23 mbpd. Consequently, inventories in the developed part of the world could jump as high as 3.3 billion bbls, 10% fuller than in the previous quarter.

This is not a happy reading but judging by the recent nearly 100% increase in front-month Brent the market is looking ahead, rather than back. This optimism is based on 2H estimates, which show significant improvements in global oil demand as well as a plausible decrease in output levels. Thirst for the black stuff will increase from 81.30 mbpd in 2Q to 94.30 mbpd in 2H. At the same time non-OPEC supply is forecast to grow by a meagre 230,000 bpd. The MOMR puts the announced production cuts at 3.6 mbpd as of May 6 and foresees a contraction of 3.5 mbpd in crude oil output outside the producer group in 2020, the lion’s share of which will take place in the US, Russia, and Canada. Demand for OPEC oil will increase by nearly 13 mbpd from 2Q for the remainder of the year to 29.54 mbpd. Oil stocks are guaranteed to deplete. The question is what the extent of this decline will be.

The eternal optimist would argue that OPEC and its allies will stick to their quota because they do not have a choice. It means that they would expect an OPEC output level of 24.43 mbpd for 2H. Wait a minute – even less than that. After all, Saudi Arabia and its Gulf allies have just volunteered to shed an additional 1.2 mbpd production and the market should not expect anything less than this promise being kept for months to come. In other words, OPEC production will be 23.23 mbpd after June. Global oil stock will be drained at a speed of 6.31 mbpd in the second half – 4.66 mbpd in 3Q and 7.95 mbpd in 4Q.

Good luck to that, the pessimist will reply. We should have learnt by now that the most carefully prepared analysis or calculation that foresees a bullish scenario will prove inaccurate in a matter of weeks. Just look at the recent stock market performance triggered by growing concerns about the second wave of the pandemic and all its economic consequences. Not to mention that high compliance that lasts beyond June is nothing more than wishful thinking. Both OPEC+ and non-OPEC+ producers will start increasing production the moment the price environment allows it. The sentiment has changed, cash markets are strengthening, time spreads are tighter and physical demand is picking up. All these will provide price supports in the next few weeks, but this confidence will not last. The potential re-emergence of the coronavirus, sluggish economic growth coupled with emerging market troubles and overoptimistic global supply growth contraction will make any price rally short-lived. Although re-visiting the recent lows is unlikely, so is a sustained price this year, they would argue.

Bullish stats, Fed warning

The sceptic would point to yesterday’s EIA statistics and to the warning from the Federal Reserve chair. US crude oil stocks registered their first draw in 15 weeks led by the 3.3 million bbls fall in PADD2 and within that the 3 million bbls decline in Cushing. The surprise data was probably down to another 300,000 bpd fall in US domestic crude oil production and diminishing imports from Canada. Producers at the northern neighbour have also been forced to shut production in because of the recent fall in oil prices and bulging inventories. US crude oil imports from Canada was down nearly 300,000 bpd on week at 2.897 mbpd. This is almost 1 mbpd below the year’s high. It will be interesting to see whether the large Cushing draw will push the front-month WTI spread into backwardation prior to next week’s expiry of the June contract.

The drop came despite refiners slowed down and cut their utilization rates by 2.6% on the week. Gasoline inventories recorded their third consecutive weekly draw as demand is picking up. Refiners supplied 7.4 mbpd of the product, up nearly 50% from five weeks ago. Distillate demand was up by a respectable 700,000 bbpd week-on-week. The growing thirst for products has been triggered by the gradual re-opening of the US economy despite over 33 million Americans have filed for unemployment benefit in the past five weeks. One can only wonder how long the decline in product stocks and the rise in demand will last. Perhaps it is no surprise that RBOB fell 658 points yesterday. Although the latest set of data was much more bullish than anticipated the rest of the complex followed RBOB. WTI lost 49 cents/bbl and closed at $25.29/bbl.  The pain was bigger on Brent, which closed 79 cents/bbl down at $29.19/bbl. Yesterday’s performance clearly implies that the US and the global economy is, indeed, facing headwinds in the war against the invisible enemy.

These concerns were confirmed by the Fed chairman. Jay Powell warned of an “extended period” of sluggish growth and stagnant wages. He said that the US central bank stands ready to provide further stimulus if warranted. Nevertheless, investors took note of his sobering and even frightening forecast and pushed the main US stock indices more than 2% lower. Yesterday the pessimist’s view prevailed.