Sometimes we buy stuff just because it is relatively cheap, and we expect the price to go higher. Other times we believe that a small real profit makes more sense than a bigger unrealized gain. Yesterday the combined effort of bottom pickers and short coverers helped risky assets recover from their recent slump. At this stage it is not entirely clear if this strength will prove protracted (probably not) but the ingredients of the sell-off -virus-induced tepid economic growth and generally over-supplied oil market- are still very much with us. India’s oil consumption, for example, was down 16% on the year in August as coronavirus cases jumped above 4.3 million in the world’s second most populous country.
In addition to the general rally in risky assets oil received additional boost from China and the expected draw in US crude oil stocks. According to data from intelligence firm Kpler, there are 840,000 bpd of US oil getting ready to start its journey to China in September. The consultancy, as Reuters reported, emphasized that these are tentative figures and might have to be revised down as the month progresses, but it still implies growing Chinese thirst for US crude. Secondly, US crude oil inventories are forecast to draw 2.4 million bbls (Bloomberg), the seventh consecutive weekly fall. Well, those who counted on a decline in crude oil inventories were left disappointed. The API reported a surprise 3 million bbls build. Analysts foresee a small draw in distillate stocks, the API reported a build of 2.3 million bbls. The silver lining around the API cloud was gasoline. It registered a drawdown of 6.9 million bbls, much steeper than the forecast of -2.7 million bbls. No wonder that the RBOB contract is the only one that is up this morning.
Hopes of immediate demand recovery are quickly fading
The recent downturn in prices have been caused by massive disappointment. This, in turn, is the result of the resilience of Covid-19. It has not been contained, partly because the pandemic is politicized and partly due to the unknown nature of the virus. Hopes for quick economic recovery have been put on hold and even the most optimistic investors are having second thoughts on near-term prosperity. This change in sentiment is reflected in the recent slump in risky assets, including oil.
The concern is that oil demand will not recover as fast as previously anticipated and therefore prices that rose above $40/bbl in recent months were running well ahead reality. The weekly EIA statistics on US oil inventories and oil consumption are always a great proxy for developments on the global supply-demand front. It will be released this afternoon and no doubt demand data will be eagerly watched. The EIA, however, provided us with another reality check yesterday after publishing the latest Short-Term Energy Outlook. Frankly, the new set of data was depressing enough to send any oil bull for a long holiday on a sunny beach if they could travel. Well, they probably cannot, so they will just patiently wait for better times in the confinement of their own dwelling.
In short, the EIA shares the concerns of those who worry about sluggish demand growth. Estimates were significantly revised downwards from last month’s report. Global oil demand for the second half of 2020 was cut by 240,000 bpd. It stands at 96.11 mbpd and whilst it is well over the 85.05 mbpd level seen in the second quarter of the year it is much below the comparable period in 2019. A year ago, worldwide consumption was 102.05 mbpd. Next year is expected to see a meaningful increase in global oil demand. The year-on-year growth is 6.53 mbpd and the absolute figure is 99.60 mbpd. It is, indeed, a massive improvement on 2020 but it is worth remembering that the number comes nowhere near to the 101.39 figure pencilled in for 2019 and it has to be pointed out that the latest prediction is some 560,000 bpd lower than last month.
Non-OPEC supply estimates are equally disheartening in that they were amended upwards together with OPEC’s other liquids. Producers outside the organization are expected to supply 63.20 mbpd in 2H 2020 and 65.36 mbpd in the whole of 2021. These are upward revisions of 290,000 bpd and 90,000 bpd respectively. The pop over $40/bbl during the summer helped US producers open the taps. This is why 2H domestic production is now predicted at 11 mbpd, up from 10.87 mbpd in August. For next year, however, it seen at 11.08 mbpd, 60,000 bpd lower than in August. Considering that back in January the US was expected to produce 13.71 mbpd the destruction of Covid is there for everyone to see.
Lower oil demand and higher non-OPEC supply naturally imply falling need for OPEC oil. The call on OPEC has been cut by 680,000 bpd to 28.05 mbpd for the second half of 2020 and by 860,000 bpd to 29.25 mbpd in 2021. Consequently, OECD oil inventories are to decline slower than previously thought. Last month they were seen at 2.893 billion bbls end 2020 and 2.859 billion bbls end 2021. Now the EIA puts the same figures at 2.939 billion bbls and 2.895 billion bbls. Despite yesterday’s impressive correction oil will struggle to regain its footing for the remainder of the year. Next year still looks tight (although less tight than it did in August), nevertheless OPEC and its allies will need to demonstrate unparalleled discipline in their attempt to keep the planned stock re-balancing on track.