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The global oil market is likely to move into deficit as early as this quarter, King Abdullah Petroleum Studies and Research Center (KAPSARC) said in its oil outlook report.
The most significant driver of this shift has been strong compliance with the production cuts agreed by OPEC and its partners (OPEC+) at the group’s historic April meeting.
The cuts agreed at that meeting were reinforced extended at the recent 19th Joint Ministerial Monitoring Committee (JMMC) meeting by one month.
It also laid out a mechanism whereby non-compliant members would add compensatory cuts in July, August and September in addition to their already agreed production adjustments for these months.
These efforts were accompanied by recovering demand, and declines in US shale and oil sands, with other conventional production expected to help balance the market going forward.
These cuts come at a time when demand in Q3 of 2020 is expected to grow by around 7.2 million barrels per day (MMb/d) quarter-on-quarter (QoQ) as economic activity recovers, while supply continues to decline by a further 1.8 million bpd.
“That said, the impact of COVID-19 and its spillover effects worldwide, with countries taking extreme measures to contain the virus, is expected to result in a year-on-year (YoY) decline in consumption of around 6.99 million bpd in 2020 - 400 thousand bpd less than our Q2 forecast,” KAPSARC added.
By any measure, this remains by far the largest annual decline ever recorded. The production cuts agreed and delivered by OPEC+, along with other natural declines elsewhere, are likely to reduce supply further if compliance remains strong. While this suggests the global oil market will move into a large deficit in H2 2020, it will take quite some time to balance global inventories due to the large increase seen in 1H 2020, which should limit further upward pressure on world oil prices.
“Total global oil demand is expected to decline YoY by 6.9 million bpd in 2020 and rebound by 5.2 million bpd in 2021, returning to 2019 levels by Q2 2022,” KAPSARC
Total global oil supply is expected to be down for 2020, with a slow recovery into 2021 and 2022. OPEC++ members will bear the majority of the decline and enjoy most of the rebound. The cuts, as stated, could be eased earlier than planned, depending on how quickly inventories can be drained.
The supply/demand trends suggest that there will be an average global surplus of 500 Kb/d in 2020. However, we expect a deficit of 3.5 million bpd for this quarter, suggesting stronger withdrawals of stock and inventory as well as oil refined products, and a deficit of 2.4 million bpd in 2021 to draw down the inventory overhang.
The current 2021 balance outlook assumes that OPEC+ members will maintain their announced production cuts throughout 2021. However, compliance will be a significant factor if pricing improves and fiscal realities test the resolves of some members.
According to KAPSARC outlook, OPEC+ members will continue with their cuts, but maintaining the absolute level of cuts may be harder, as the projected imbalances are estimated to reach a deficit of 2.4 million bpd.
As a result, there is an opportunity for OPEC+ members to ease their cuts as soon as H1 2021, which would allow for a shift in strategy to gain market share from shale and other producers.
The market has been experiencing a flattening contango since April. We estimate that prices will gradually increase and be supported in 2H 2020. By far the biggest variable is demand. The depth and duration of the economic downturn in 2020 and 2021, and the policy measures to manage the spread and impact of COVID-19, including the physical stimulus packages, will dwarf the impact of the supply cuts on oil prices.
KAPSARC predicted an average global surplus throughout 2020 (albeit moving into deficit in 2H 2020) and a continued and deepening deficit in 2021.
We anticipate that cuts will be primarily focused on conventional oil this year. However, tight oil production will struggle the most in 2020 since most of it will be involuntary. It was estimated in January that US shale was already facing difficulties and that the sector’s growth would slow to a still robust 1 million bpd, despite prices being around $60/b. However, given the situation now, shale’s difficulties have only accelerated.
This will create space for more conventional oil to come on stream in 2021 than previously expected. If current trends continue and inventories are unable to be withdrawn any faster, and shale production shows more resilience than expected, then OPEC+ members may be required to maintain their cuts in order to balance the markets.
If OPEC+ members kept production levels similar to those of 2019, the market surplus could surpass 5 million bpd this year. However, the market would balance in 2021 because many other producers would halt production if prices collapsed even further. In all scenarios, this balancing act is expected to create a favorable environment for prices to eventually rise, albeit slowly. However, this may also come at the risk of supporting the shale industry, particularly at levels above $45/b.
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