On the face of it, the US Gulf Coast and the global oil demand outlook share little in common. Yet both have taken a battering recently. A string of hurricanes has wreaked havoc on the former while the latter has been on the receiving end of a host of bruising forecasts. At the start of this week, BP warned that oil demand may not recover from the COVID pandemic. This chimed with downbeat updated oil demand estimates from the EIA and OPEC. Yesterday, the IEA added further fuel to the bearish fire after cutting its oil demand projections for the second month running.
The agency now expects global oil consumption to decline by 8.43 mbpd in 2020, up 350,000 bpd from last month’s forecast. At the heart of the increasing pessimism are the deteriorating demand growth prospects for the coming quarter. The IEA slashed its global oil demand forecast for the final quarter of 2020 by a whopping 615,000 bpd from a previous estimate. Simply put, the recovery in oil demand is expected to moderate significantly in the year-end period. Underpinning this weakening outlook is the resurgence in COVID-19 outbreaks. A second wave is taking hold across Europe while cases continue to rise in Asia and Latin America. The accelerating pandemic is hitting key oil demand centres such as India and Brazil especially hard.
Faced with this upsurge in infections, several countries have bolstered the stringency of containments measures. This, in turn, has acted as a drag on the recovery in mobility and economic activity. All the while, demand has also been adversely impacted by changing consumer habits, chief among which is teleworking. Workers are tentatively returning to the office though the share of workers engaged in working from home is expected to remain substantially higher than during the pre-COVID era. This long-term change in consumer behaviour will inevitably lead to a permanent loss in demand for transportation fuel.
To make matters worse, global oil supply is on the upswing. The OPEC+ alliance is driving supply higher as it relaxes production cuts in line with the group’s agreement. At the same time, countries spared from OPEC+ cuts including Iran and Libya also increased production last month, according to the IEA. What is more, further gains from the North African producer are pencilled in amid reports that a blockade of its eastern oil ports will soon end. Similarly, the output recovery in countries not part of the OPEC+ supply pact is expected to gather pace in the coming months as shut-in volumes return to the market. Small wonder, then, that the IEA now forecasts non-OPEC supply will average 63 mbpd this year, 200,000 bpd more than previously thought though still 2.6 mbpd below the 2019 level.
The combination of persistent demand weakness and a rebound in global supply does not bode well for the call on OPEC crude. Indeed, the IEA now expects demand for OPEC crude will average 27.75 mbpd in the second half of this year, down a hefty 600,000 bpd from the August estimate. Consequently, the IEA’s implied stock draws in 2H20 now stands at about 3.4 mbpd, nearly 1 mbpd less than previously thought. Nevertheless, this still points to a period of de-stocking. And it’s not a moment too soon. OECD commercial oil stocks rose counter-seasonally in July to an all-time high. While they are expected to have pulled lower in August, initial signs indicate they will bounce higher this month. The upshot is that widely-anticipated stocks draws have yet to materialise. It remains to be seen whether the make-or-break year-end period will provide the glutted oil market with a much-needed reprieve. What is certain is that scepticism over the oil rebalancing will endure so long as the world continues to grapple with the COVID crisis.
All eyes on the US
The IEA’s negativity failed to make for a down day on the oil markets yesterday. Instead, the two leading crude markers gained around $1/bbl on the back of weather-related production shutdowns in the Gulf of Mexico. More than a quarter of US output in the region has been taken offline as a precaution ahead of Hurricane Sally’s expected landfall on the US Gulf Coast. Alongside these supply disruptions, oil prices were provided with a tailwind from a rebound on global stock markets. This came as investors cheered upbeat retail sales and industrial output data from China, a solid increase in US factory production and improving German investor sentiment.
Adding further support to the broader risk-asset complex were expectations that the Federal Reserve will maintain a dovish stance. Its latest policy meeting concludes today and will most likely refrain from rocking the boat after recently shifting its inflation targeting. Overnight, the API provided a further injection of bullish impetus after reporting a sharp decrease in US crude inventories. Stocks plunged by 9.5 million bbls last week, smashing forecasts for a build of 1.3 million bbls. Meanwhile, gasoline stockpiles unexpectedly rose by 3.8 million bbls while distillate fuels inventories posted a surprise drop of 1.1 million bbls. As much as a feel-good factor appears to have returned to the oil market, underlying fundamentals remain far from supportive.