EXECUTIVE SUMMARY

Crude oil prices rose in June 2020 and continued to move higher for the second consecutive month, with the ICE Brent and the NYMEX WTI benchmarks reaching three month highs to average $40.77 / bbl and $38.31 / bbl, respectively, on continued improvements in physical crude oil market fundamentals as the oversupply eased. The ongoing rebalancing process was supported by a good conformity level of production adjustments from the OPEC and participating non-OPEC producers in the effective OPEC+ agreement, in addition to extending the first phase of the production adjustment agreement by one month, to the end of July. In addition, announcements of individual compensatory adjustments by several producing countries that had not been able to meet full conformity underpinned market sentiment. The oil market was also supported in June 2020 by a gradual recovery in crude demand and rising refinery throughputs in the main refinery hubs, amid increased mobility, as lockdowns and travel restrictions eased in many countries and cities. Indeed, data showed a significant rebound in refinery operations in June in the US, China, India and in many European countries. Furthermore, the EIA forecast that the US shale supply in July 2020 would fall to the lowest level since July 2018, while data from Baker Hughes indicated a sharp decline in drilling activity in the US, with the number of active oil and gas rigs falling for 16 consecutive weeks. At the end of June, the number of active oil and gas rigs in the US fell to an all-time low of 265 units, 73% below the level of this time last year.

However, the price rally was limited, as uncertainty remains and investors are still cautious about the speed of oil demand recovery, amid a rise of COVID-19 infections worldwide and the risk of a second wave that could jeopardize the recovery in oil demand and the world economy. Indeed, data in June 2020 showed emerging new clusters in many countries and cities where lockdowns and restrictions were relaxed. The persistent high level of global oil stocks, and the record increase of US crude oil stocks in June, also added downward pressure. Moreover, the narrowing contango structure of crude oil futures in recent month has made floating storage unprofitable, which induced increasing crude offers from floating storage that also leaned on crude oil prices on the prompt markets. To speak exactly about the period under report, then crude oil prices continued their upward movements and moved to new marginal highs since early March 2020. The ICE Brent spot price lifted by nearly another 4% over last 4 weeks and ended the period under report at $43.1 / bbl, while the NYMEX WTI spot price performed a little bit weaker and rose by just 2.1% during the period under report to $40.6 / bbl. Meanwhile, it became more and more evident that crude oil prices have failed to drift higher further and to overcome the threshold of 45.0 / bbl. So it began to look like that the rally on the oil market in July 2020 has run out of steam, although the picture didn’t deteriorate enough to say about the reversal.

The OPEC as a whole in June 2020 continued to adjust its production to new conditions of severe demand destruction within the 2nd quarter of 2020 and to meet requirements of the new OPEC+ agreement. So, the cartel curbed its crude oil output in June 2020 by another 1.93 mln bbl / d relative to the level of May 2020, or -7.9% mom. In absolute terms, a cumulative volume of crude oil production by OPEC states dropped to 22.6 mln bbl / d, the level unseen for more than two decades. Relative to the volume of April 2020, the OPEC diminished its total production by unbelievable 7.77 mln bbl / d, or more than 25%. Further decline of total output of the cartel in June 2020 was caused mainly by additional obligations of some OPEC members (Saudi Arabia, Kuwait and the UAE) to deliver voluntarily more production cuts that were taken as a result of regular OPEC+ meeting held on June, 6. The OPEC as a whole demonstrated a high conformity level of 95% in June 2020 at realization of its obligations under the recent OPEC+ agreement, as almost every country in the cartel delivered a production cut in the month under review relative to May 2020 except for Gabon and Libya. The main cutback of crude oil production within the OPEC in June 2020 was again made by Saudi Arabia as the kingdom took additional commitments to reduce production by another 1.0 mln bbl / d. So, Saudi Arabia’s production rate in June 2020 tumbled by another 1.19 mln bbl / d relative to the level of previous month, or -13.0% mom, to as low as 7.53 mln bbl / d. Significant monthly drop of crude oil output within the OPEC in June 2020 was also recorded in Iraq, where an output of crude oil contracted by 300 thsd bbl / d in contrast to May 2020, or -7.1% mom, and Venezuela that kept on to lose its oil industry as production in this country tumbled by another 210 thsd bbl / d in monthly terms, or -38.2% mom, to as low as 340 thsd bbl / d.

Total oil production around the globe in May 2020 experienced the most severe crush in decades in monthly terms and tumbled by 11.14 mln bbl / d in compare with the volume of April 2020, or terrible -11.4% mom. In absolute terms, a volume of global oil output dropped down to the lowest level over nearly two decades. Before May 2020 a comparable amounts of oil were produced in the world as a whole as early as in autumn of 2011. Obviously, the main reason behind so deep production cuts around the globe in May 2020 was a historical OPEC+ agreement. Crude oil production in May 2020 was lower than it was in April 2020 in almost all major non-OPEC producers except for Australia. However, the main cutback of output was delivered by the states that participated in the new OPEC+ agreement, first of all Russia and the USA. To speak in numbers, an output of crude oil in Russia in May 2020 tumbled by 1.96 mln bbl / d in contrast to the volume of April 2020, or fierce -17.3% mom, while in the USA a production of crude oil collapsed with the same period of time by 2.1 mln bbl / d, or comparable -17.3% mom, relative to the level of the previous month. So, these two non-OPEC countries, which are two largest oil producers outside the OPEC, were accounted for more than 85% of cumulative monthly cut of production outside the cartel. Besides Russia and the USA, considerable monthly curb of crude oil production among non-OPEC states in May 2020 was recorded in such countries as Canada, where the figure collapsed by 429 thsd bbl / d, or morbid -11.5% mom, other ex-USSR states, where a rate of monthly output decline as a whole was equal to 152 thsd bbl / d, or -6.3% mom, Oman that lost nearly 138 thsd bbl / d of crude oil extraction, or awful -16.9%, and Norway that produces 101 thsd bbl / d less oil in the month under consideration in compare to the previous month, or -5.7% mom. Mexico and the UK were also among the countries that reduced considerably their output of crude oil in the month under review by 90 thsd bbl / d, or -5.2% mom, and 52 thsd bbl / d, or -5.2% mom, respectively.

Total crude oil production in the USA in June 2020 prolonged to slide down at a rapid pace for the 3rd month in a row, a volume of monthly crude oil output tumbled in the month under review by another 525 thsd bbl / d relative to the previous month, or -4.6% mom, to the lowest level since May 2018. 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 June 2020 was lower by 2.1 mln bbl / d, or -16.2%. Despite to a continuing rally in prompt prices of crude oil in June 2020, although not so powerful than during the previous month, US oil producers in general kept on to curb their output to adjust production to horrible demand destruction linked with COVID-19 quarantine measures implemented not only in the USA, but in all major countries of the world. Very surprisingly, a cumulative production of shale oil in the USA in June 2020 demonstrated a positive monthly performance, although a rate of growth was minor. 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 11 thsd bbl / d relative to the volume of the previous month, or marginal +0.2% mom. However, in comparison to one year ago volume, total production of shale oil in the USA in June 2020 dropped significantly; a yearly rate of decline was equal to 1.01 mln bbl / d, or formidable -11.7% 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.

According to the most recent monthly report of the IEA, new data confirm that the worst of the demand destruction was in the first half of the year when demand fell by 10.75 mln bbl / d. For the second half the agency expects an improvement in the level of decline to 5.1 mln bbl / d. The IEA estimates that global oil demand this year will average 92.1 mln bbl / d, down by 7.9 mln bbl / d versus the volume of 2019, a slightly smaller decline than was the forecast in its June monthly report. This is mainly because the decline in 2Q20 was less severe than expected initially. For 2021, the IEA have made some minor adjustments to its outlook and demand will be 97.4 mln bbl / d; but due to the improved outlook for 2020 the recovery next year is lower at 5.3 mln bbl / d. Average demand in 2021 will be 2.6 mln bbl / d below the 2019 level with jet/kerosene accounting for three-quarters of the deficit.

Total commercial stocks of crude oil and oil products in OECD states in April 2020 expanded with a shocking pace of growth as global markets of crude oil and oil products have got double hit, both from demand and supply side. Supply shock was caused by Saudi Arabia’s decision to start a price war on a crude oil market and to pump as much oil as it could, while demand shock obviously was linked with containment measures called to prevent rapid spread of COVID-19 around the world. So, the total volume of commercial stocks of oil in OECD countries in the month under review built up by 148.6 mln bbl in contrast to the volume of March 2020, or +5.0% mom. On a year-over-year basis oil stocks in OECD countries expanded even more materially comparing to a monthly basis. An annual growth rate was equal to 252.0 mln bbl, or +8.7% yoy. In absolute terms, the cumulative volume reached the level of 3.14 bn bbl, and this is the highest number over at least recent two decades. Moreover, monthly and yearly rate of total stocks expansion in April 2020 also were record high for many years. However, the month of April was not the worst month in a current crisis from a point of view of global stocks performance as the situation turned to be even worse during the following month, namely May 2020. According to the preliminary IEA data for this month, the volume of total oil and oil products inventories in OECD states continued to explode and rose by another 81.7 mln bbl (2.64 mln bbl / d) to a new record of 3.22 bn bbl.

Total commercial inventories of crude oil in the USA in June 2020 nearly unchanged comparing to the level of May 2020. A continued process of lifting containment measures both on federal and regional level across the whole USA took its toll on demand on refined oil products within the country, so US refineries started to ramp up their production. On the other hand, US oil producers continued to pump less amounts of crude oil to let the country to satisfy the requirements of the latest OPEC+ agreement. Nevertheless, it is worthwhile to mention that 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 530 mln bbl despite to all the positive fundamental changes both on demand and supply sides. So, as the 2^nd wave of COVID-19 epidemic eventually got hit the USA in June, it is too early to say that total commercial stocks of crude oil in the country has already reached their highest point during the current crisis, from our point of view. Meanwhile, a performance of crude oil stocks in the Cushing storage in Oklahoma (the basis for NYMEX WTI crude oil futures) in June 2020 again diverged materially from the performance of total commercial inventories of crude oil in the USA. In particular, stocks of crude oil in the Cushing storage went down for the 2^nd month in a row and tumbled 6.1 mln bbl relative to the volume of the previous month, or -11.9% mom. Apparently, the figure proceeded to be below the average level for the month of June over last 5 years. Nevertheless, relative to the end of February level, inventories of crude oil in the Cushing storage in June 2020 was nearly 25% higher.

Total floating inventories of crude oil around the globe proceeded to expand in June 2020 for the 4th month in a row and rose considerably within the month under review by another 45.4 mln bbl relative to the level of the previous month, or +26.4% mom. In absolute terms, a volume of the stocks by the end of June 2020 reached the level of 217 mln bbl and this is a new record high of the indicator over the whole history of observations by Vortexa. As for a year-over-year dynamic, then total volume of crude oil that held of floating storages in June 2020 again demonstrated much more impressive performance relative to the monthly one. To be more specific, a volume of floating inventories in June 2020 skyrocketed by 161.6 mln bbl in compare to the level of June 2019, or nearly +290% yoy.

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07 2020, Arbat Capital

oil, investment

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