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Oil market fall less than expected

The International Energy Agency’s (IEA) latest (May 2020) Oil Market Report says that better-than-expected mobility in OECD countries and the gradual easing of lockdown measures means it now forecasts 2Q2020 demand to fall by around 20mn b/d year-on-year, about 3mn b/d under its original forecast. For 2020 as a whole, the IEA expects demand to drop by 8.6mn b/d, although it warns that a resurgence of COVID-19 is a major risk factor for demand.

Oil prices collapsed this year after the fall in demand led to oversupply. The IEA estimates production will drop by a ‘spectacular’ 12mn b/d in May 2020, to a nine-year low of 88mn b/d, as the OPEC+ agreement takes effect and production declines elsewhere. For some OPEC countries, eg Saudi Arabia, Kuwait and the UAE, lower May production is from record highs in April. Led by the US and Canada, April supplies from countries outside of the deal were already 3mn b/d lower than at the start of the year.

The peak decline for global refining activity has shifted to May as the IEA’s April throughput estimate is revised up on new data and higher demand. In 2Q2020, global runs are expected to fall by 13.4mn b/d year-on-year, with 2020 average throughput down by 6.2mn b/d. Signs of refinery storage bottlenecks started multiplying at the beginning of May, with several refineries in Europe, Asia and Africa reported to be closed for an indeterminate period.

OECD data for March shows that industry stocks rose by 68.2mn barrels (2.2mn b/d) to 2,961mn barrels. Total OECD stocks stood 46.7mn barrels above the five-year average and, due to the weak outlook, now provide a ‘massive’ 90 days of forward demand coverage, notes the IEA. Preliminary data show that US crude stocks built by 53.7mn barrels in April (1.8mn barrels), and crude inventories in Europe and Japan also rose by 3.1mn barrels and 3mn barrels, respectively. In April, floating storage of crude oil increased by 9.9mn barrels to 123.8mn barrels.

The report also notes that oil prices fell in April 2020 on weak demand due to COVID-19 and record-high Middle Eastern exports. Negative oil futures prices were seen for the first time when Nymex WTI settled at –$37/b the day before the May contract expired. Easing lockdown measures in some countries provided support to gasoline markets. However, jet cracks fell below zero as aviation activity remains depressed. Crude and product shipping costs rose as more vessels were chartered for floating storage.

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