FW: IEA Oil Market Monthly – World Oil Demand Estimate Slashed Again

https://www.iea.org/reports/oil-market-report-april-2020

 

·         Global oil supply is set to plunge by a record 12 mb/d in May, after OPEC+ forged a historic output deal to cut production by 9.7 mb/d from an agreed baseline level. As April production was high, the effective cut is 10.7 mb/d. Additional reductions are set to come from other countries with the US and Canada seeing the largest declines. Total non-OPEC output falls could reach 5.2 mb/d in 4Q20, and for the year as a whole output may be 2.3 mb/d lower than last year. 

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·         Refining throughput in 2020 is forecast to fall 7.6 mb/d y-o-y to 74.3 mb/d on sharply reduced demand for fuels. Global refinery intake is expected to plummet by 16 mb/d y-o-y in 2Q20, with widespread run cuts and shutdowns in all regions. Although refinery runs are falling, product stocks are still expected to build by 6 mb/d. In 2H20, refining activity will slowly recover as the global market moves into deficit. 

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·         Early data show China’s implied stock build in 1Q20 at 2.1 mb/d, and US stocks increased by 0.5 mb/d. OECD data show that industry stocks in February fell by 35.4 mb to 2 878 mb as a draw for products more than offset a build in crude. Total OECD oil stocks stood 42.4 mb below the five-year average and, due to the weak outlook, now provide 79.2 days of forward demand coverage. In March, floating storage of crude oil increased by 22.9 mb (0.7 mb/d) to 103.1 mb. 

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·         Twin demand and supply shocks caused oil futures prices to fall by 40% in March. Brent has recovered modestly from an 18-year low as producers reached agreement to curtail output and is trading at $31/bbl. Weak demand pushed prices for crude grades such as WTI Midland and West Canadian Select below $10/bbl. Cracks for gasoline and jet fuel continued to suffer as containment measures were introduced.

 

Back from the brink ?

Around the world billions of people are affected by one of the worst health crises of the past century. The global economy is under pressure in ways not seen since the Great Depression in the 1930s; businesses are failing and unemployment is surging. Confinement measures are in place in 187 countries and territories, and although they vary in scope, activity in the transportation sector has fallen dramatically almost everywhere. Even assuming that travel restrictions are eased in the second half of the year, we expect that global oil demand in 2020 will fall by 9.3 million barrels a day (mb/d) versus 2019, erasing almost a decade of growth. 

Against this bleak background, policy makers are responding with radical steps. Governments have introduced massive emergency fiscal plans to support workers and businesses. Central banks have embarked on huge monetary stimulus programs. We are also seeing measures being taken to tackle the oil market crisis, with two major events taking place over the past week.  

On Sunday, oil producers in the OPEC+ group agreed to cut output by an initial 9.7 mb/d versus their agreed baseline, effective 1 May. In light of the unprecedented depth of the crisis, the IEA has urged major consumers and producers to work together through the forum of the G20 to mitigate the impact on market stability, and an extraordinary meeting of energy ministers from G20 and other countries took place on Friday 10 April. Those present offered their support for the efforts of the OPEC+ countries to stabilize the oil market and, in some cases, discussed output cuts that would take place immediately or over time. 

The measures announced by OPEC+ and the G20 countries won’t rebalance the market immediately. But by lowering the peak of the supply overhang and flattening the curve of the build-up in stocks, they help a complex system absorb the worst of this crisis, whose consequences for the oil market remain very uncertain in the short term. We forecast a drop in demand in April of as much as 29 mb/d year-on-year, followed by another significant year-on year fall of 26 mb/d in May. In June, the gradual recovery likely begins to gain traction, although demand will still be 15 mb/d lower than a year ago. There is no feasible agreement that could cut supply by enough to offset such near-term demand losses. However, the past week’s achievements are a solid start and have the potential to start to reverse the build-up in stocks as we move into the second half of the year.  

The OPEC+ and G20 initiatives will impact the oil market in three ways. First, the OPEC+ production cut in May to reach the baseline will actually be 10.7 mb/d and not 9.7 mb/d, as April production was high. This will provide some immediate relief from the supply surplus in the coming weeks, lowering the peak of the build-up of stocks. Second, four countries (China, India, Korea and the United States) have either offered their strategic storage capacity to industry to temporarily park unwanted barrels or are considering increasing their strategic stocks to take advantage of lower prices. This will create extra headroom for the impending stock build-up, helping the market get past the hump. Third, other producers, with the United States and Canada likely to be the largest contributors, could see output fall by around 3.5 mb/d in the coming months due to the impact of lower prices, according to IEA estimates. The loss of this supply combined with the OPEC+ cuts will shift the market into a deficit in the second half of 2020, ensuring an end to the build-up of stocks and a return to more normal market conditions. At the time of publication, we were still waiting for more details on some planned production cuts and proposals to use strategic storage. If the transfers into strategic stocks, which might be as much as 200 mb, were to take place in the next three months or so, they could represent about 2 mb/d of supply withdrawn from the market. 

If production does fall sharply, some oil goes into strategic stocks, and demand begins to recover, the second half of 2020 will see demand exceed supply. This will enable the market to start reducing the massive stock overhang that is building up in the first half of the year. Indeed, our current demand and supply estimates imply a stock draw of 4.7 mb/d in the second half. 

The historic decisions taken by OPEC+ and the G20 should help bring the oil industry back from the brink of an even more serious situation than it currently faces. Even so, the implied stock build-up of 12 mb/d in the first half of the year still threatens to overwhelm the logistics of the oil industry – ships, pipelines and storage tanks – in the coming weeks. In this Report, we estimate that available capacity could be saturated in mid-year, based on our market balances. However, this is a very broad-brush assumption and the situation varies from place to place. There are already bottlenecks in other parts of the logistics chain, such as competition to buy space on pipeline systems that transport oil. There are also quality issues: it is not possible to accommodate different qualities of crude oil at many sites, and special tanks are required for some products. Floating storage is becoming more expensive as traders compete for ships. Chartering costs for Very Large Crude Carriers have more than doubled since February. Never before has the oil industry come this close to testing its logistics capacity to the limit. 

Looking beyond the immediate imbalances in the market, the IEA pointed out to the G20 energy ministers that although low prices might appear to be attractive to consumers, they are of little benefit to the approximately 4 billion people living under some form of Covid-19 lockdown. Also, low prices impact the livelihood of millions of people employed along the oil industry’s extensive value chain, and they damage the economies of weaker producing countries where social stability is already fragile. 

Low prices threaten the stability of an industry that will remain central to the functioning of the global economy. Even with demand falling by a record amount this year, oil companies still face the challenges of investing to offset natural production declines and to meet future growth. Global capital expenditure by exploration and production companies in 2020 is forecast to drop by about 32% versus 2019 to $335 billion, the lowest level for 13 years. This reduction of financial resources also undermines the ability of the oil industry to develop some of the technologies needed for clean energy transitions around the world. 

There is clearly a long way to go before we can put the Covid-19 crisis behind us. However, we are encouraged by the solidarity shown by policy makers from producing and consuming countries working together to meet this historic challenge of bringing stability to the oil market. 

 

IEA World Oil Supply/Demand Key Forecasts

World oil demand 2020 fcast was revised to 90.5m b/d from 99.9m b/d in Paris-based Intl Energy Agency’s latest monthly report.

2019 world demand was revised to 99.8 from 100.0m b/d

Demand change in 2020 est. -9.3% y/y or -9.4m b/d

Non-OPEC supply 2020 was revised to 63.2m b/d from 67.1m b/d

Call on OPEC crude 2020 was revised to 22.1m b/d from 27.3m b/d

Call on OPEC crude 2019 was revised to 28.9 m b/d from 29.5m b/d

OPEC crude production in April rose by 2,620k b/d on the month to 31.2m b/d

 

OPEC Produced 28.6m B/D in March, Will Pump More Before Cut: IEA

The Organization of Petroleum Exporting Countries produced 28.58m b/d last month and will probably pump more in April before making fresh cuts in May, the International Energy Agency said in its monthly market report.

Saudi Arabia pumped 10.15m b/d in March, and early indications point to 12m b/d in April

Iraq’s production totaled 4.59m b/d last month, and will probably hold steady in April

U.A.E. output was 3.5m b/d in March and may rise to 4m b/d this month

Total OPEC production may reach 31.2m b/d in April, before the new round of output curbs kicks in

 

Onshore Crude Storage Capacity to Be Filled by Mid-Year: IEA

Estimated stockbuilds for 1st half of 2020 “would lift combined crude stocks to within their operational capacity limits by mid-year,” the International Energy Agency said in its monthly oil market report.

IEA estimates 1.2b bbl of available storage capacity unfilled at end-January, while global stocks could build at a rate of 11.9m b/d in 2Q20

86% of shipping capacity, or nearly 1.9b bbl, is employed with another 10-12% unavailable, leaving 2-4%, or 45-90m bbl, that could be available for floating storage

Falling refining activity may free up another 10-15% of shipping capacity, or 220m-330m bbl, for storage

Since end-January, short term floating storage has increased by nearly 25m bbl, IEA says, citing shipbroker EA Gibson

Not all storage capacity will be readily available to everyone wishing to store oil

Crudes of different quality need to be kept separately, while heavy crudes require heated storage

For products, it is easier to “store middle distillates over extended periods than gasoline components (due to volatility) or heavy fuel oil (which must be heated)”

 

Some of Nigeria’s Oil Output May Be Uneconomic at $40/Bbl: IEA

Nigeria still has many April-loading crude cargoes unsold as sellers struggle to place remaining barrels due a rapid decline in demand, IEA says in monthly report.

“With average costs estimated at around $40/bbl, some production looks uneconomic”

Low oil prices along with an increase in deep-water royalties announced last year could prompt international oil companies to review long-delayed upstream projects like Bonga Southwest

Shipments rose to Angola’s key market of China in early April; still, some of its deep-water projects could also be reviewed, with breakeven also estimated around $40/bbl

 

Oil Companies’ Upstream Investment to Plunge 32% in 2020: IEA

Oil and gas upstream spending is expected to fall 32% y/y to $335b this year, compared with previous guidance of $490b, the IEA said in its monthly market report.

Savings to come from reduced activity, delays to the sanctioning of new projects and greater cost control

U.S. exploration and production companies are expected to cut spending by as much as 40%

Oil majors are set to reduce upstream investment by 20%

Exxon to cut its Permian rig count by 20%

Chevron to reduce Permian spending by close to $2b

Oil companies announced steep reductions in their 2020 spending plans after crude prices plummeted last month

While the pullback isn’t expected to have a significant immediate impact on most oil supply, it will put future supplies at risk, potentially leading to more price volatility even after the coronavirus crisis is resolved: IEA

 

Norway Oil Output Expected to Drop to 1.9m B/D in May-Dec.: IEA

Norwegian crude-oil production is expected to drop to 1.9m b/d from May to December, equivalent to a cut of ~200k b/d, the IEA said in its monthly Oil Market Report.

Even so, “Norway becomes the largest non-OPEC contributor to global supply growth in 2020, with flows up 225k b/d” from a year earlier, mainly as a result of the Johan Sverdrup field ramp-up

Sverdrup is “positioned to perform well in a low price environment with operating costs below $2/bbl”

READ, April 13: Norway to Decide on Potential Oil-Output Cut in ‘Near Future’

IEA also says Covid-19 has had little impact on Norwegian production but cases were reported at offshore platforms including Martin Linge

The suspension of development work at the platform may cause first oil to be pushed back to 2021: IEA

 

Global Oil Supply May Soon Plunge to Lowest Since 2011, IEA Says

“Global oil supply could tumble below 90m b/d in the next few months, a level not seen since 2011,” the International Energy Agency said in its monthly market report.

Global supply set to fall by record 12m b/d m/m in May, after OPEC+ deal to cut 9.7m b/d from baseline level; effective cut is 10.7m b/d due to high production in April

Further reductions to come from other countries, with largest from the U.S. and Canada

Total non-OPEC output declines could be 5.2m b/d in 4Q, and 2.3m b/d in 2020 compared with 2019

“The measures announced by OPEC+ and the G-20 countries won’t rebalance the market immediately” but help the system absorb the worst of the crisis

Gradual recovery likely to begin in June

Demand to fall as much as 29m b/d y/y in April to the lowest level since 1995; consumption will be down 26m b/d in May

“There is no feasible agreement that could cut supply by enough to offset such near-term demand losses”

 

Virus to Hit European Refiners Hard With 50% Drop in Runs: IEA

OECD Europe could be one of the worst hit regions in terms of refining activity, the IEA said in its monthly report.

Global refinery intake set to fall by 16m b/d y/y in 2Q; widespread run cuts and shutdowns expected in all regions

European utilization rates forecast to drop in 2Q to 50%, the lowest regional rate globally

U.S. Gulf Coast will see massive product builds even as runs slump to the lowest since Hurricane Harvey in September 2017

As of early April, available product storage on USGC was around 180m bbl, significantly more than commercial crude storage, estimated at 100m bbl

Mexico remains a net product importer even with demand loss in 2Q

Russian operations are hampered by relatively full tanks, with some of the contaminated Urals still in storage

Oil companies reportedly storing crude in rail cars

OECD Asia forecast to have the highest utilization rates in 2Q

“Temporary closures and deep run cuts are needed to balance product markets, but this crisis could also trigger some permanent shutdowns”

 

Coronavirus Spurs Record Drop in Fuel Demand in April, IEA Says

Oil demand is set to fall by a record 29m b/d y/y in April due to measures to contain the coronavirus, with gasoline likely the worst affected, the IEA said in its monthly report.

Consumption is set to slide by 25.8m b/d in May

“From June onwards, demand will start a long slow rebound toward year-ago levels, as containment measures are progressively lifted”

Demand loss for specific oil products, y/y:

Gasoline:

April demand to fall by record 11.2m b/d, followed by drop of 10m b/d in May

For 2020, demand forecast to drop by 2.9m b/d, or 11%

Gasoil, diesel:

Demand forecast to fall by 8.6m b/d in April, 7.8m b/d in May

For 2020, drop seen at 2m b/d, or 7%

Jet fuel and kerosene

April demand to fall by 4.6m b/d, or 59%, also a record

For 2020, demand likely to drop by 2.1m b/d, or 26%

Notes 15% of jet/kerosene used in heating and cooking and that will see little or no contraction

Impact on other oil products, such as LPG, ethane, naphtha and residual fuel is less acute

 

 

Jonathan Wagner

Ion Energy Group

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