The increase in US initial jobless claims has been slowing in recent weeks. The European service and manufacturing sectors showed some kind of consolidation this month, according to IHS Markit’s composite PMI. The same goes to the UK, where businesses are reporting better climate than last month. German business morale recorded it biggest ever monthly jump, the Ifo Institute survey showed. No surprise then that stock markets all over the world have been buoyed. In this optimistic and hopeful financial atmosphere, the IMF provided the market with a stark reminder that upbeat economic data has to be viewed in perspective.
The international lender made a significant downward revision of its economic growth estimates for this year and next. It now sees the global GDP contract by 4.9% in 2020, down from 3% from its April projection. Next year’s expansion is expected to be 5.4%, compared to 5.8% two months ago. Despite the gradual easing of lockdowns globally the Fund said that both investment and consumption have had to take a bigger blow than originally anticipated. The downbeat IMF prediction has provided the perfect excuse for equity investors to stampede towards the exit. Growing fears about the second spike of the virus outbreak added to the gloom. New York has imposed a 14-day quarantine for visitors from Covid-19 hotspots in the US. Several states have halted reopenings as new cases surged. The S&P 500 index lost 2.6% of its value yesterday. The herd, however, could easily change direction again as central banks and governments will be fast to reiterate their willingness to do whatever they can to mitigate the negative impact of the pandemic by using all available fiscal and monetary tools.
The already sour mood considerably worsened when the EIA released its usual weekly US oil data. The report was another nail in the bulls’ coffin although it was not as depressing as the price fall suggests. Both total commercial and crude oil inventories continued their upward trajectories and reached yet another record high. The former built 4 million bbls on the week and reached 1.45 billion bbls. This would be sufficient to cover 79 days of domestic demand at the current rate of 18.35 mbpd. The jump in industrial stocks implies that OECD inventories will be very close to 3.35 billion bbls by the end of the current quarter. If correct, OPEC+ has a mountain to climb to bring them back below 3 billion bbls. WTI fell out of bed and finished the day $2.36/bbl lower at $38.01/bbl. Brent followed suite and closed at $40.31/bbl, a daily loss of $2.32/bbl.
The bigger-than-expected build in crude oil stocks is actually not as bearish as it looks at first sight. Taking away the nearly 1 million bbls increase on the West Coast the figure is much closer to expectations. It is worth noting that net crude oil imports dropped to 3.38 mbpd – arrivals of foreign crude stood at 6.54 mbpd and exports rose 700,000 bpd to 3.16 mbpd on the week. Preliminary data shows that Saudi arrivals are declining – from the high of 1.59 mbpd at the end of May to 1.38 mbpd last week. The surprise reversal in domestic production also contributed to yesterday’s price fall. Output recovered by 500,000 bpd to 11 mbpd suggesting that producers are able and willing to increase output with WTI above $40/bbl.
On the positive side oil consumption is healthy. Weekly product demand increased by more than 1 mbpd to 18.35 mbpd, the highest reading since mid-March. It was chiefly down to the 740,000 bpd jump in gasoline consumption as consumers are getting out of the confinement of their properties and into their cars. Surging new cases, however, could put a temporary halt on domestic gasoline demand growth. NYMEX RBOB fell 10 cents/gallon yesterday in what appears to be a massive profit-taking largely driven by record high commercial oil stocks. Gasoline inventories drew by a forecast-beating 1.67 million bbls whilst distillate stocks grew marginally.
Progress cannot be stopped
Technological advances transformed the way oil (and any other commodities or financial instruments for that reason) are traded. With the introduction of electronic exchanges 15 years ago futures volume in the energy market skyrocketed. Average daily volume in Brent was, for example, 100 million bbls in 2004. This year it is almost twelve times as much although global oil demand has only increased by 21% or 17.3 mbpd between 2004 and 2019 from 82.5 mbpd to 99.8 mbpd (IEA data). The rise in financial demand has way exceeded the growth in physical consumption.
Progress and development in technology and IT have not only converted the way oil is traded but have also permeated the oil industry as a whole, including exploration and production. The OOC Oil & Gas Blockchain Consortium announced at the beginning of the month that it had completed a pilot project at the Bakken shale field for water management. The company, which was set up by Chevron, ConocoPhillips, Equinor, ExxonMobil, Hess, Marathon Oil, Noble Energy, Pioneer Natural Resources, Shell and Repsol, used a blockchain platform called Gumbo Net to automate produced water haulage from field reading to invoice payment including recording wastewater disposal data. The project was run at five Equinor wells.
The result of the pilot has been more than encouraging. The workflow process has been reduced from 90-120 days to one to seven days, the number of steps in the process fell from 16 to 7 and the test was able to free up 25%-35% of resources. According to the chair of the consortium the pilot was able to show that automated validation can trigger automated payments to vendors, provide transparency, increase efficiency, eliminate disputes, improve co-operation between parties involved, and generally significantly reduce costs.
Gumbo Net is already providing services for companies involved in a range of activities from water management through shipping to drilling. Water haulage is a small fraction in the process of getting oil out of the ground but the result of this pilot will not go unnoticed. Due to its efficiency and cost-saving features, blockchain, a distributed ledger, will be used more broadly in the oil industry in coming months and years. The incentive to use this technology is huge and so are the potential implications. One can imagine that if the production cost of a barrel of oil were cheaper than it is now the supply disruption caused by the Covid-19 pandemic, for example, would have been less severe.