Supply likely to spring back in July

Oil markets are now settled with Dated Brent trading around $35/bbl thanks to increased commitment to production cuts (14.4 million b/d) by OPEC+ and large non-OPEC producers for May and June along with a more pronounced spring back in demand (4 million b/d per month) as lockdown has started to be lifted, according to Chris Midgley, Global Director of Analytics, S&P Global Platts.

Supply is likely to spring back in July as producers relax May/June cuts, with OPEC’s June 10 meeting critical around maintaining cuts into the second half of the year. S&P Global Platts Analytics expects quotas will be maintained, but the additional 1.2 million b/d cuts by Saudi, Kuwait, and UAE in early May will likely come back onto the market.

“There is a risk that production from North American shale creeps higher responding to a partial recovery in crude prices, while the oil demand recovery is expected to slow down by September to 1 million b/d, in the seasonally weaker period.

There is also the risk of secondary waves of infection posing a significant risk to oil demand,” said Midgley.

Outlook for global oil supply

Global oil supply is having steepest drops in May and June, just as demand starts to recover, but supply will start to return in July. Global oil supply is set to decline by over 14 million b/d from April to June, on strong compliance with the OPEC+ deal, other non-OPEC responses, and follow on losses in NGLs, refinery gains, and biofuels, according to Shin Kim, Head of Supply and Production Analytics, S&P Global Platts.

“These declines are coming just as global oil demand recovers from April lows, but shut in barrels will start to return heavily in July, although a full recovery will take time. We now see global oil supply contracting by 7 million b/d year on year in 2020.

The key question for oil markets is what price does OPEC+ (Saudi Arabia and Russia) want to support, to draw on bloated global inventories, maximize revenue, but not over-stimulate non-OPEC (US shale) production. All eyes are on the June 10 OPEC+ meeting. We expect an agreement to roll over current quotas (no reduction in cuts) through 3Q,” Kim commented.

Outlook for global oil demand

Gasoline demand shows signs of a V shape recovery since it reached the bottom in April on the back of gradual reopening of the economies in the US, Western Europe, Asia and elsewhere, says Kang Wu, Head of Global Demand, Risk and Asia Analytics, S&P Global Platts.

Demand in May is estimated to have gone up by nearly 4 MMB/D over April though remained some 17 million b/d below May 2019 levels. Further month on month improvements in demand each month is expected for the Jun-August period.

However, risks of second-wave hits of Covid-19 globally have also increased. It is particularly challenging for Latin America, the Middle East and Africa, and to a lesser extent South Asia. Barring the global hit of second wave Covid-19 during the latter half of this year, S&P Global Platts sees an annual demand decline of 8.4 million b/d for 2020 as a whole.

“Asia has also been hit hard by the economic slump despite the opportunity to be first in line to recover from the Covid-19 pandemic among all major regions around the world. India in particular saw the worst year on year demand destruction in history last month, bringing Asia’s April demand down by 5 million b/d year on the year together with demand destruction in Southeast Asia, before it improved in May. Demand for the whole year is likely to be 1.9 million b/d below that of 2019,” added Wu.

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