The variables impacting the oil market remained the same this week with US oil inventories down, coronavirus cases up and the price holding range-bound in the low forties.
In early trading on Friday, Brent crude was priced above US$43 with WTI still holding above US$40 a barrel.
Stockpiles in the US dropped more than 10.5 million barrels last week according to the Energy Information Administration, putting inventories at 526 million barrels. This is the biggest drawdown of stocks since December. The EIA also said that US imports had declined by a million barrels, currently running at 1.9 million barrels a day.
Looking at global energy demand for the rest of the year, Rystad Energy revised its outlook this week saying, “instead of gradually recovering monthly, global oil demand in our base case is now expected to stay relatively flat from July to October 2020 and then inch up from November”.
The figures speak for themselves. Pre-Covid, global oil demand was expected to be above 100 million barrels a day. Rystad said July 2020 figures were 90.2 million barrels and expectations for December might rise to 94.7 million barrels a day.
With such a reduction in OPEC supply, it was expected the US would soon draw more on its own stocks, hence the stronger figures this week. But the global picture may not be as reassuring, with the market remaining in contango, indicating a surplus market structure for later in the year.
This is partly why we see little movement in the oil price in recent weeks with many analysts fearing a lower for longer price structure.
The traders seem to be the only ones happy in this scenario with many of the major trading houses storing crude at these prices in the hope to sell at a higher price in the future.
As oil companies all reported losses and less than spectacular second quarter results this season, the trading arms of the major oil companies seemed to be faring best in recent weeks. The CEO of Shell, Ben van Beurden told Bloomberg TV that the trading arm proved “what a unique capability it is” and said he is beginning “to see recovery in those parts of the world that have gone past the first wave,” citing China and Russia.
Oil demand growth
The state of the global health pandemic and the resulting economic fallout weighs heavy on the prospects of oil demand growth. The US Federal Reserve left interests unchanged and pledged to do what it can to help the economy as well as pledging additional Covid-19 related relief.
US economic output fell 9.5 percent in the second quarter, the largest fall on record, prompting many economists and commentators to compare this to the Great Depression.
The president of Prestige Economics, Jason Schenker says he is not surprised about the Fed decision and suggests it will remain the same until 2022. Consumer confidence and industrial output remain low and unemployment grows higher, above 17 million in the US this week.
Schenker rules out any recovery back to final quarter 2019 levels and says we might be waiting two years to see such positive levels. He adds: “it may be a long road, especially if cases become more prevalent in the fall and winter, which is typically a season when Coronaviruses thrive.”
With little encouraging news on the horizon, survival through the summer months will be the big focus. The market should be better prepared for a second wave of the coronavirus, but no-one expects any major surge in oil demand growth in the coming months.