IEA Oil Market Report - Oct 16

[dan_s]

The IEA Oil Market Report (OMR) is one of the world's most authoritative and timely sources of data, forecasts and analysis on the global oil market – including detailed statistics and commentary on oil supply, demand, inventories, prices and refining activity, as well as oil trade for IEA and selected non-IEA countries.

Highlight from the October 2020 Report My comments are in blue.

Global supply fell 0.6 mb/d to 91.1 mb/d in September, down 8.7 mb/d on 2019, as the UAE slashed output and maintenance cut flows in the North Sea and Brazil, more than offsetting a US rebound from August’s hurricane shut-ins. In 4Q20, world supply may rise towards 92 mb/d from 91.3 mb/d in 3Q20 if Libyan output continues to recover and assuming OPEC+ produces to its target. Total non-OPEC supply is set to drop by 2.6 mb/d in 2020 before recovering by 0.4 mb/d in 2021. < A recovery in non-OPEC+ supplies will only happen in 2H2021 if oil prices rebound to over $60/bbl. No matter what oil prices do through year-end, non-OPEC+ production will fall steadily through Q1 2021.

Global oil demand rose 3.4 mb/d month-on-month (m-o-m) in July, as coronavirus restrictions eased and summer holidays in the northern hemisphere supported a rise in transport fuel demand. However, a second wave of Covid-19 cases and new movement restrictions are now slowing demand growth. Our 2020 forecast is unchanged at 91.7 mb/d, down 8.4 mb/d from 2019. Our 2021 forecast is also largely unchanged at 97.2 mb/d, showing a gain of 5.5 mb/d from 2020. < Note that the 2021 demand forecast is much higher than where supply is today.

Strong gains in global refinery throughput in July and relatively stable runs in August and September came at the cost of steep falls in margins, which in 3Q20 saw one of their worst quarters. In 4Q20, demand and refining forecasts imply large product stock draws, but refinery margins may not get an immediate boost. In 2021, runs will rebound only partially, to levels last seen in 2015.

In August, OECD industry stocks fell by 22.1 mb (0.71 mb/d) m-o-m to 3 194 mb, and were 209.1 mb above their five-year average level. Preliminary data for September show that crude stocks in the US and Japan fell by 6.5 mb and 1.8 mb, respectively, while those in Europe rose by 3.3 mb. Implied global stocks fell by 2.3 mb/d in 3Q20 and are projected to fall by 4.1 mb/d in 4Q20. In September, volumes of crude oil held in floating storage fell sharply by 70 mb (2.33 mb/d) to 139.1 mb.

Crude futures fell in September versus August, partly reflecting weaker financial markets. ICE Brent fell by-$3.15/bbl and NYMEX WTI by -$2.76/bbl m-o-m to $41.87/bbl and $39.63/bbl, respectively. Prices saw a 10% early-October jump ahead of Hurricane Delta. Physical prices e.g. North Sea Dated, remained below the futures front month reflecting a well-supplied prompt market. Freight rates remain at historically weak levels as tanker activity sits at a near 10% deficit to 2019 levels.

Highlights
Six months ago leading oil producers came together, supported by an extraordinary meeting of G20 energy ministers, to coordinate massive production cuts to offset the collapse in oil demand caused by Covid-19 lockdowns and so provide life support to the oil market. It was impossible at that time to know how extensive the damage from the pandemic would be and for how long life support would be needed. Stabilising the market was the aim and to the extent that oil prices have been remarkably steady since mid-June and observed oil stocks drew in the third quarter (-0.9 mb/d ), the efforts of the producers have shown some success.

However, as we said in last month’s Report, the outlook remains fragile. The trajectory for Covid-19 infections is strongly upwards in many countries and governments are tightening restrictions on the movements of their citizens. This surely raises doubts about the robustness of the anticipated economic recovery and thus the prospects for oil demand growth. Reflecting new data we have revised down our demand estimates for the third quarter of 2020 (-0.2 mb/d), with weakness seen particularly in North America (including Mexico) and India. The overall demand estimate for 2020 is largely unchanged at 91.7 mb/d (down 8.4 mb/d versus 2019), as is the estimate for 2021 at 97.2 mb/d, (up 5.5 mb/d year-on-year). < Reports of rising Covid-19 infections rarely if ever mention that we are doing much more testing than we did earlier in the year. IMO the key stats are severe cases that need to be hospitalized and deaths. Padding the stats with millions of mild cases doesn't tell us much. Also, never mentioning the large percentage of people who have recovered doesn't fit the narrative.

Global oil supply fell in September as OPEC+ countries improved the compliance rate with their agreement. Also, maintenance and unplanned outages curbed output in Brazil, Canada and the North Sea. In October, Hurricane Delta shut in record volumes of United States offshore production, although initial reports suggest that damage to infrastructure is limited and output is expected to recover quickly. Of greater long term significance is the potential for a sustained increase in production from Libya. There have been several false dawns in recent years, but the latest ceasefire has seen output pick up already. Our balances assume an increase in Libyan production from 0.3 mb/d currently to 0.7 mb/d in December. Libya, being outside the OPEC+ agreement, can produce at the level it wishes. < Libya is the definition of a "Failed State" and any production forecast for Libya is a "WAG".

Our global demand and supply estimates (including an assumption of full compliance with the OPEC+ agreement) imply a significant stock draw of 4 mb/d in the fourth quarter. While this is a large change, it is happening from record high levels. With the 1.9 mb/d increase in the OPEC+ production ceiling currently planned for 1 January, there is only limited headroom for the market to absorb extra supply in the next few months. Also, there is a risk that the demand recovery is stalled by the recent increase in Covid-19 cases in many countries.

The uncertain outlook that could see the draw down of stocks falter is reflected in the fact that physical prices have weakened and this has brought down the front of the forward curve for Brent crude oil. The longer term offers little encouragement for the producers; the curve shows prices not reaching $50/bbl until 2023. Truly, those wishing to bring about a tighter oil market are looking at a moving target.
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Capital Expenditure Budgets for upstream companies will be set by mid-December. There is very little chance that drilling budgets will be increased in 2021. As I have shown you many times in my podcasts, U.S. oil production will not stop falling until we have 600 active rigs drilling for oil. Today, Baker Hughes reported that there are only 205 rigs drilling for oil and only 74 drilling for gas. Also, the International Active Rig Count declined by 45 in September and is now down 429 since September 2019.