EXECUTIVE SUMMARY

Crude oil prices continued to rally in the month of July 2020 and rose further, settling up by about 6% on a monthly average. The prices were supported by further improvements in oil market fundamentals, bullish economic data, and an improved oil demand outlook after several countries eased lockdown measures. Hereby, crude oil prices increased for the 3^rd consecutive month amid increasing evidence that the oil market is heading gradually toward rebalancing in 2H20, although both the ICE Brent and the NYMEX WTI rally slowed down over July 2020 and remained range-bound, trading in a narrow interval. On a monthly average, the ICE Brent ended July 2020 higher by $2.45, to settle at $43.22 / bbl, and the NYMEX WTI rose by $2.45 to $40.77 / bbl. Crude oil prices were buoyed in July 2020 by a series of supportive economic data from the US, Europe and China, suggesting a steady economic recovery, in addition to massive economic stimulus packages in the US and Europe to shore up the economy. In the second part of July, oil prices climbed to their highest levels since early March after EU leaders agreed on a historical economic stimulus deal to support its member countries hit by COVID-19. Furthermore, prices rose on the back of data showing increasing crude demand from refiners in the US, India and China, falling US crude oil stocks from the high levels in June, and a drop in US drilling activity to a record low in July, which suggests a further decline in US shale supply in the coming months. Oil prices were also boosted by a weakening in the US dollar value against a set of other currencies, which increased demand for commodities traded in the US dollar like crude oil. The value of the US dollar index fell in July to its lowest in two years. News about COVID-19 vaccine trials in several laboratories also added optimism to the market.

Nevertheless, the oil price rally within the month of July 2020 was capped amid signs of a fragile recovery in the global economy and continuing uncertainties regarding the COVID-19 pandemic. The significant rise in the number of new cases worldwide, particularly in some large economies like the US, India and Brazil, have added worries about a slowdown in economic activity and the recovery in oil demand. In India, several states have extended lockdown periods to stem the spread of the virus and the EU has again tightened its travel recommendation restrictions on non-essential travelers. Tensions between the US and China continued, and the domestic political uncertainty in the US, following the elections-delay suggestion, added to concerns. Investors were also weighing the entry into force of the second phase of the OPEC+ agreement from August, 1, although part of the additional supply will be taken up by domestic demand in OPEC+ countries and part will be offset by some countries compensating for overproduction in previous months. However, in early August 2020 crude oil prices overcame the threshold of $45.0 / bbl and posted the highest close in 5 months after the data from the EIA showed a large drop in crude inventories in the USA. But the spike in prices turned up to be short-lived and had no extension in subsequent weeks. As for exactly about the period under report, then crude oil prices continued their upward movements and moved to new highs over last 5 months in early August 2020. The ICE Brent spot price rose by nearly another 1.9% over last four weeks and ended the period under report at $43.9 / bbl, while the NYMEX WTI spot price rallied more materially and increased by 3.5% during the period under report to $42.0 / bbl.

Total crude oil production by the OPEC as a whole in July 2020 recovered considerably comparing to the level of the previous month as additional voluntary obligations to curb oil output totaling 1.2 mln bbl / d made by Saudi Arabia, the UAE and Kuwait in the month of June 2020 has expired. So the cartel extended its crude oil production in the month under review by 0.9 mln bbl / d relative to the level of June 2020, or +4.0% mom. Nevertheless, in absolute terms a cumulative volume of crude oil production by OPEC states in July 2020 has remained at the levels unseen for more than two decades before COVID-19 pandemic and equal to 23.43 mln bbl / d. So, in contrast to one year ago level, total OPEC’s crude oil output in July 2020 was lower by a huge amount of 6.36 mln bbl / d, or -21.3% yoy. As on July OPEC+ meeting that was held on July, 15, the participating countries agreed to extend the first phase of the production adjustments until only the end of the month of July 2020, OPEC’s total output in the following month of August 2020 will continue to grow significantly. According to some preliminary estimates, the expansion can be equal to a serious amount of 2.0 mln bbl / d. Nevertheless, the pace of growth will be limited somewhat by a compensation mechanism for participating countries that were not able to achieve full conformity in May, June and July. The 10 members with quotas under the OPEC+ accord achieved 94% compliance with their committed production cuts in July 2020, according to the latest S&P Global Platts calculations.

Meanwhile, total oil production worldwide in June 2020, in accordance with the most recent monthly data from the EIG, continued to decline in compare to the volume of the previous month and dropped by another 2.0 mln bbl / d, or -2.3% mom. In absolute terms, the volume of global oil production in June 2020 slid down to nearly 85.0 mln bbl / d, the level that is just slightly above the lowest mark over last 10 years. Last time before the month under review a comparable amounts of oil were produced in the world as a whole as early as in May 2011. The main cutback of crude oil production in June 2020 in contrast to the volume of May 2020 was recorded in such states as Brazil, Russia, Norway and other ex-USSR states. Thus, an output of crude oil in Brazil in the month under review dropped by 258 thsd bbl / d relative to the previous month, or meaningful -8.7% mom, while in Russia a production of crude oil decreased by 194 thsd bbl / d, or -2.0% mom. In Norway, a monthly rate of production decline in June 2020 was equal to 155 thsd bbl / d, or -8.9% mom, and other ex-USSR states as whole produced 150 thsd bbl / d less crude oil in the month under review than they did on month ago. Canada, Malaysia and the UK were also among the countries that reduced their output of crude oil in the month under review in compare to the previous month. The same time, the most essential monthly growth of crude oil output in June 2020 in compare to May 2020 among non-OPEC oil producing countries took place in China and Colombia. In China, the volume of crude oil extraction ramped up in the month under review by 92 thsd bbl / d, or +2.4% mom, while in Colombia the figure rose by 77 thsd bbl / d, or material +9.8% mom. Considerable monthly growth of production in the month under consideration was also recorded in such states as Argentina (+49 thsd bbl / d or +10.4% mom) and Australia (+42 thsd bbl / d or +11.5% mom). Oman and India also built up their crude oil extraction in June 2020 in monthly terms by 16 thsd bbl / d, or +2.4% mom, and by 7 thsd bbl / d, or +1.1% mom, respectively.

Total crude oil production in the USA in July 2020 recovered a little bit after a sharp downward spur over three previous months. So, a volume of crude oil output rose in the month under review by 150 thsd bbl / d relative to the volume of June 2020, or +1.4% mom. Notwithstanding, crude oil production in the USA remained close to the minimal levels over last two years. It is worthwhile to remind that just before the start of COVID-19 pandemic crude oil production in the USA had reached a new historical maximum above the threshold of 13.0 mln bbl / d. Comparing to that level, crude oil output in the country in July 2020 was lower by 1.98 mln bbl / d, or -15.2%. Despite to a continuing rally in prompt prices of crude oil in recent months, US oil producers in general prefer to sit on the sidelines and not to intensify their crude oil production, although a considerable part of spare capacities in the USA are more flexible than in the other regions of the world. It seems that the most US energy companies consider current restoration of demand for oil as very fragile, especially given discouraging statistic of COVID-19 new cases around the world. According to the most recent data provided by Rystad Energy, total output of shale oil in the USA in the month under review rose by 185 thsd bbl / d relative to the volume of the previous month, or +2.4% mom. However, in comparison to one year ago volume, total production of shale oil in the USA in July 2020 was considerably lower than it was one year ago; a yearly rate of decline was equal to 930 thsd bbl / d, or serious -10.6% yoy. So, notwithstanding to positive monthly dynamic, the level of shale oil production in the country remained close to the lowest levels since summer of 2018.

In accordance with the most recent monthly report of the IEA, global oil demand is expected to be 91.9 mln bbl / d in 2020, down 8.1 mln bbl / d on year-over-year basis. Hereby, the IEA reduced its 2020 forecast by 140 thsd bbl / d, the first downgrade in several months, reflecting the stalling of mobility as the number of COVID-19 cases remains high, and weakness in the aviation sector. The IEA revised data show that in April 2020 the number of aviation kilometers travelled was nearly 80% down on last year and in July 2020 the deficit was still 67%. With few signs that the picture will improve significantly soon, the agency downgraded its estimate for global jet fuel and kerosene demand. According to the most recent assessments, in 2020, demand will be 4.8 mln bbl / d, or 39%, below the 2019 level, and in 2021 the year-on-year recovery will be just below 1 mln bbl / d. These are the main components of the IEA’s revision to the total 2020 oil demand picture from a decline of 7.9 mln bbl / d seen last month to 8.1 mln bbl / d for now. Meanwhile, the IEA pointed out that China’s oil demand was recovering strongly, up 750 thsd bbl / d in yearly terms in the month of June 2020. For 2021, the IEA reduced the expected rebound in growth to 5.2 mln bbl / d from 5.3 mln bbl / d seen previously.

Total commercial stocks of crude oil and oil products in OECD states in May 2020 continued to grow, although with a slower rate of expansion relative to the previous month. Despite to a powerful response from the supply side of oil market as OPEC+ countries forged a historical deal to curb output by more than 10 mln bbl / d, demand destruction worldwide was even more severe in the month under review, so oil stockpiles continued to grow. Total volume of commercial stocks of oil in OECD countries in the month under review rose by another 58.3 mln bbl in contrast to the volume of April 2020, or +1.9% mom. On a year-over-year basis, oil stocks in OECD countries apparently expanded much more substantially comparing to a monthly basis. An annual growth rate was equal to 265.8 mln bbl, or +9.1% yoy. In absolute terms, the cumulative volume of stockpiles almost reached the level of 3.2 bn bbl, and this is the new record high over at least recent two decades. Despite to a very material improvement of the supply side within the months of May and June of 2020, preliminary IEA data for June 2020 showed a further expansion of total OECD oil stocks, although also less meaningful than in May 2020. According to the IEA data, OECD industry stocks rose by another 16.2 mln bbl to 3.23 bn bbl in June 2020, so in the first half of 2020 they increased at an average rate of 1.78 mln bbl / d.

Total commercial inventories of crude oil in the USA in July 2020 contracted by 14.9 mln bbl, or -2.8% mom, comparing to the level of June 2020. It is a little bit of surprise as the 2nd wave of COVID-19 epidemic began the USA in the month of June 2020 and continued within the month of July, so a process of easing containment measures on federal and regional levels across the USA was mainly stopped or even reversed back in some areas. Nevertheless, it seems that US refineries continued to ramp up their production during the month under review, encouraged by the signs of demand for oil products recovery across the USA. It ought to be remarked that the volume of commercial stockpiles of crude oil in the country declined in the month under review even in circumstances of increase of crude oil production by US oil producers. Meanwhile, despite to a certain monthly reduction total commercial inventories of crude oil in the USA in the month under review remained to stay on a very elevated level above the threshold of 500 mln bbl despite to all the positive fundamental changes on demand side. Meanwhile, crude oil stocks in the Cushing storage in Oklahoma (the basis for NYMEX WTI crude oil futures) in July 2020 again showed opposite monthly dynamic relative the performance of total commercial inventories of crude oil in the USA. Despite to a certain contraction of the overall crude oil inventories in the country, stocks of crude oil in the Cushing storage reversed after declining for 2 months in a row and rose in the month under review by 6.4 mln bbl relative to the volume of the previous month, or formidable +14.0% mom. To say more, the figure returned above the average level for the month of July over last 5 years. Relative to pre COVID-19 level of the end of February, inventories of crude oil in the Cushing storage in July 2020 was nearly 40% higher. As for yearly performance, then a volume of crude oil stocks in the Cushing storage in the month under consideration also expanded and built up by 3.1 mln bbl relative to the volume of July 2019, or +6.3% yoy.

Total floating inventories of crude oil worldwide in July 2020 finally reversed after 4 months of rapid expansion in a row and a new record high as result and shrank by 33.4 mln bbl relative to the level of the previous month, or -15.2% mom. In absolute terms, the volume of the stocks that held on floating storages globally by the end of the month of July 2020 slid down below the threshold of 200 mln bbl. As for a year-over-year dynamic, then total volume of crude oil that held of floating storages in July 2020, apparently, again was much higher than it was one year ago in July 2019. To provide more numbers, a volume of floating inventories in July 2020 exploded by almost 130 mln bbl in compare to the level of July 2019, or more than +230% yoy.

Download PDF

08 2020, Arbat Capital

oil, investment

Read more