The current week kicked off where the previous one ended. Although the day was characterized by negative developments, both in the oil and the financial markets, risky assets continued their march higher. The reaction to increasing worldwide coronavirus cases was non-existent. The WHO reported worrying rises in new cases in Latin America, especially in Brazil. The US and China have also experienced new outbreaks. South Korea now considers itself to have been hit with the second cycle of the virus. The conclusion one can currently draw is that the pandemic has not been contained. Yet both oil and stock markets trended higher.

It is becoming increasingly plausible that unless there are new lockdowns or curfews imposed across the globe investors’ optimism will persist in the near future. The major US stock indices all gained yesterday (Nasdaq settled at a record high) despite existing home sales fell to their lowest level in more than 9 years – a clear indication of the battle the US economy faces to re-gain all the ground that has been lost since March.

Of course, the oil market likes taking its cues from stocks as the latter is a widely accepted proxy for oil demand. The continuous decline in US rig counts also helped yesterday’s positive performance. No wonder that the both the expiring July and the August contract in WTI settled over the $40/bbl. The US marker has not closed over this mark since March 6. Brent matched WTI’s performance with a daily gain of 89 cents/bbl. Although Urals and Siberian Light crude oil loadings are set to increase a little from Novorossisk in the July 1-10 period Russian exports will drop from 1.3 million tonnes in June 1-9 to 900,000 tonnes a month later from Primorsk and Ust-Luga ports, according preliminary schedules as reported by Reuters. Russian compliance to the output agreement weighed more yesterday than the resumption of oil production from the Khafji and Wafra oil fields in the Neutral Zone. The current investor climate is positive and bullish but there are warning lights flashing all around.

In the early hours of today’s trading oil and stock prices fell sharply only to recover 30 minutes later. In an interview with Fox News White House trade adviser Peter Navarro said that the trade deal with China was over because of Beijing’s handling of the coronavirus outbreak. Shortly after the announcement President Trump contradicted his China hawk and tweeted that the “China trade deal is fully intact”. If only administrations could be held responsible for lack of transparency.

Both supply and demand are constantly revised down

It has been three months now that the coronavirus outbreak started to spread globally. The modern world has never faced such a threat therefore early estimates of COVID-19 on the global oil balance was understandably nothing more than guesswork. Now that the pandemic has hopefully hit its peak and economic data is filtering through a more informed view can be formed as what to expect in the second half of 2020. When the projections of the last six months are compared there are two important conclusions that can be drawn. Firstly, the pandemic’s impact on global oil demand is very significant. Secondly, oil output is expected to suffer even more than consumption. The table below sums up the average monthly estimates from the EIA/IEA/OPEC for the latter part of the year.

Starting with demand 2H 2020 global consumption has been cut by an unprecedented 7.13 mbpd between January and June. Worse yet, estimates have been constantly revised down since March. Worldwide oil demand was expected to be 101.97 mbpd for the second half of the year three months ago. The latest projections put it at 95.31 mbpd. Despite lockdowns are being eased and economic data are improving the thirst for black gold has been constantly amended to the downside. It shows the devastating impact the coronavirus has on the economy although the latest monthly downward revision has been the smallest, so far. Of course, a potential second wave of the virus outbreak would push demand estimates well below the 95 mbpd mark.

Non-OPEC supply has been slightly more adversely affected than demand. Together with the “OPEC other liquid” category it stood at 72.82 mbpd in March. There months later it is anticipated to be 65.99 mbpd, a reduction of 6.83 mbpd. Consequently, demand for OPEC oil has been upped from 29.15 mbpd to 29.32 mbpd since March. It is, however, worth noting that production is more sensitive to oil price movements than demand. Should the OPEC+ group manage to stick to the April agreement through June and July as expected, thus supporting prices, involuntary cuts will be partially reversed loosening the relatively tight supply-demand balance for the remainder of the year.

Saudis OPEC share increases

As the table below shows the latest call on OPEC oil for 2H 2020 is only 200,000 bpd below the January forecast. The difficulty the oil market is currently facing, ie, bulging oil stocks, was created in March and April. Of course, oil demand was destructed as the world came to a complete standstill, but this situation was exacerbated by the market share war between Russia and Saudi Arabia. The kingdom was true to its threat at the beginning of March and hit the production accelerator the following month pumping 11.64 mbpd. Total OPEC output stood at 30.50 mbpd in April. If the warring parties had decided to co-operate instead of the taking up the hatchet oil prices would have never fallen where they fell to two months ago and probably 200 million bbls of oil would not have gone into storage.

It, however, did and now what started as a price war has been turned into the biggest co-ordinated production cut deal in the history of the oil market. One of the main architects of this agreement was Saudi Arabia and one would have thought that the accord involved the kingdom giving up some of its share of the market within OPEC. Far from it. The OPEC heavyweight is historically responsible around 30%-32% of OPEC’s production. In April, with its output above 11 mbpd it claimed 38% of the cake but this share remained at a very respectable 35% in May despite its output level fell to 8.48 mbpd. As far as production levels are concerned the kingdom’s influence has actually increased within the group compared to the historical average.