Despite a reported rise in oil inventories last week, bullish trading returned to oil markets with Brent closing at $43.24, up by 10.02 percent w/w, while WTI closed at $40.55, down by 0.25 percent w/w. Crude oil prices showed a downward trend last Thursday and Friday, as the EIA reported an unexpected build of 5.7 million barrels in commercial crude inventories including an increase of 0.6 million barrels in the SPR. The rise in inventories is expected to be partly due to a rise in imports by 1.425 million bbl/d w/w, and a decline in exports by 0.705 million bbl/d w/w leading to a net import of 2.13 million bbl/d. The rise in crude commercial inventories came with a decline in gasoline inventories of 4.8 million bbl/d, the highest since March, which indicates significant demand recovery. Refinery runs rose marginally by 0.315 million bbl/d w/w, to 14,347 million bbl/d while production remained unchanged at 11 million bbl/d. The rig count continued its decline but at a slower rate, falling by 4 rigs to 181 active oil rigs in total.
OPEC+ JMMC is set to ease cuts this week
The market will be closely watching the OPEC+ JMMC meeting which is expected to be held this week on the 15thof July to review compliance in June and ease cuts. Prices declined slightly on Monday morning because of the bearish expectations associated with that meeting. According to Platts, OPEC+ compliance for the month of June stands at 106 percent with Saudi Arabia and Russia achieving 136 percent and 100 percent, respectively. Countries falling behind their cut commitment targets are mainly African producers including Nigeria, Gabon, Angola and Congo, while Iraq has shown enhanced compliance rates standing at 90 percent. Non-OPEC producers joining the OPEC+ alliance have all shown high compliance rates, from 92 percent to 147 percent, with the exception of Mexico whose compliance stands at 73 percent. Compliance from Iraq is set to improve even further as the country intends to fully produce below its OPEC+ quota, 3.592 million bbl/d May-July, in July in order to compensate for its 500 thousand bbl/d overproduction in May.
It is expected that OPEC+ will roll back its current cuts from 9.6 million bbl/d to 7.7 million bbl/d starting in August and running through to December 2020. This reduction is expected to offset a demand increase from 92.33 million bbl/d to 94.33 million bbl/d, according to forecasts by CMarkits. Furthermore, deeper cuts from producers falling behind their targets in May-June could mean that OPEC+ cuts will continue to be above 7.7 million bbl/d until December 2020. Under the anticipated production ease, Saudi Arabia and Russia are expected to ramp up their production by more than 400 thousand bbl/d to 8.99 million bbl/d starting from August.
Libya also lifted force majeure on Es Sider which raises concerns of extra supplies into the European light sweet market currently suffering from low refining margins leading to reduced refining runs. On the other hand, the export situation in Libya remains complex as ports are blockaded by the Haftar forces, a situation that we do not expect to resolve itself any time soon.
Prices could weaken following the ease of OPEC+ cuts, but we expect them to rebound on improving economic data especially from China and India as the COVID-19 situation starts to improve.
IEA and EIA revise up their demand forecast
CMarkits expect the markets to be undersupplied by 4.16 million bbl/d and 5.76 million bbl/d in Q3 and Q4, respectively. The IEA’s latest market report expects demand to stand at 94.5 million bbl/d in Q3 and 97 million bbl/d in Q4 2020, which is higher than CMarkits’ forecast. CMarkits’ forecast assumes a change of consumer behavior, less traveling combined with significantly reduced aviation due to COVID-19. The IEA has further raised its demand forecast by 0.4 million bbl/d in 2020 to 92.1 million bbl/d, down 7.9 million y/y, and 1.76 million bbl/d higher than CMarkits’ forecast.
On the other hand, the EIA sees U.S. oil production in 2020 standing at 11.63 million bbl/d, down by 0.6 million bbl/d y/y, while CMarkits’ forecast predicts 11.74 million bbl/d, down by 1.14 million bbl/d y/y. The EIA also estimates that U.S. demand will hit 18.3 million bbl/d in 2020, down by 2.1 million y/y. This is 0.21 million bbl/d lower than the CMarkits forecast of 18.51 million bbl/d. Current gasoline demand is around 8.8 million bbl/d, compared with an average of 9.5 million bbl/d before the crisis, and up by almost 3.8 million bbl/d from its level last April. The EIA has further raised its demand forecast for this year by 0.19 million bbl/d standing at 92.9 million bbl/d, 0.8 million bbl/d higher than the IEA figures, and 2.56 million bbl/d higher than CMarkits’ forecast. OPEC is expected to release its monthly oil market report this week revising its demand forecast while reporting the latest production data for the month of June.
Aramco continues to raise its OSP for August
Meanwhile, Saudi Aramco has raised its OSPs for the month of August where Arab heavy, which is normally sold at a $2-6 discount to Arab light, will be sold at the same price as Arab light, signaling strong demand for medium-heavy sour grades. In the month of June, 73 percent of the OPEC crude was sold to Asia, despite price hikes of major Middle East crude grades. The Russian grade Urals also flipped to record premiums to the dated Brent benchmark, $2.4/bbl last week, showing clear signs markets undersupply for key consumers in China and Northern Asia. Last April, Urals was sold at more than $4.50/bbl discount to dated Brent.