June was a month when global stocks saw some relief of 2.2 million barrels per day (bpd) of implied oil inventory draws
The upcoming partial return of curtailed OPEC+ oil production from August is set to create a new four-month supply glut of around 170 million barrels, a Rystad Energy analysis reveals. The analysis is based on the assumption that oil demand will not rebound as quickly as previously thought due to the persistent expansion of the Covid-19 pandemic in key markets, or what we call a mild second wave of the virus.
After the first five months of 2020, which all registered excess global oil production compared to market demand, June was a month when global stocks saw some relief of 2.2 million barrels per day (bpd) of implied oil inventory draws. July, the last month of OPEC+’s record 9.7 million bpd output curtailment commitment, is also set to end with demand surprisingly exceeding supply by 1.9 million bpd.
But with the mild second wave already hitting several countries, we scale back our total liquids (crude, condensate, NGLs, other liquids, and refinery gains) demand recovery expectations in the short-term. Between August and October, total liquids demand levels will stay flat at around 90.5 million bpd, before rising to 92.9 million bpd in November and 94.6 million bpd in December.
Unlike demand, global oil supply is set for a mini growth rally after reaching an astonishing low of 86.4 million bpd in June and an expected 88.2 million bpd in July. The planned output increase from the OPEC+ alliance and the reactivation of other global shut-in production is forecast to push supply to 91.2 million bpd in August, 92.5 million bpd in September, 92.9 million bpd in October and 93.3 million bpd in November, before closing at 93.4 million bpd in December.
“OPEC’s experiment to increase production from August could backfire as we are still nowhere near out of the woods yet in terms of oil demand. The overall liquids market will flip back into a mini-supply glut and a swing into deficit will not happen again until December 2020,” says Bjornar Tonhaugen, Rystad Energy’s Head of Oil Market Research.
Nevertheless, the total surplus of about 170 million oil barrels that will be created between August and November is only a fraction of the 1.4 billion-barrel stock overhang that was built up in the first five months of 2020. This historic inventory build-up will still act as a soft brake on price increases when demand rebounds.
On the supply side, the US provided a much-needed supply-side buoy. We made major revisions to both our historical and future output projections. Based on preliminary reporting from most of the big oil-producing states and satellite data that give us insights into frac activity, we now believe that oil production (crude and condensate) reached a bottom of 10.4 million bpd in May 2020.
While oil production in the US will rise from now and until September, we have revised down our growth expectations due to low frac activity and natural decline. Production is estimated to bounce back toward the 11 million to 11.2 million bpd range and then degrade towards 10.7 million bpd again in 4Q20 and 1Q21 as the current activity level is insufficient to offset the natural base decline.
In addition, we revised down Iraqi oil production by about 200,000 bpd as the country makes good on its promise to make up for past missed OPEC+ compliance. Country-wide production will drop to 3.8 million bpd in Jul-20, we forecast, compared to our initial view that its output would struggle to get below the 4 million bpd barrier. We expect to see Iraq oil production capped below 4 million bpd through October but then will see output gradually increase again.
“We doubt that the market can take the additional production volumes from OPEC+ from August without negative consequences for oil prices, as the new glut will likely cancel some of the gains that led Brent to post Covid-19 highs of about $44 this month,“ Tonhaugen concludes.
Our balances suggest that OPEC+’ tapering plans to year-end may need to be put on hold if the goal is to sustain the oil price recovery. This can of course still happen, perhaps already in a month, as OPEC’s market monitoring committee will be reassessing the market on a monthly basis.