EXECUTIVE SUMMARY

Crude oil prices witnessed a recovery since early May on the back of optimism that global oil market fundamentals would improve faster than expected after several European and Asian countries, along with a number of US states, started to ease COVID-19 lockdown measures. In the month of May 2020, the ICE Brent benchmark rose by $5.78 / bbl, or +21.7%, to average $32.41 / bbl, and the NYMEX WTI benchmark soared by $11.83 / bbl, or +70.8%, to average $28.53 / bbl. Investors’ optimism was particularly bolstered on signs of a recovery in activity in countries such as China, with the country’s services sector growing in May for the first time since January. The oil market continued to strengthen as the historic voluntary production adjustments from OPEC and non-OPEC producers under the new OPEC+ agreement took effect on 1 May, and several major OPEC producers announced further voluntary supply adjustments for June 2020, in order to accelerate the oil market rebalancing process. Furthermore, non-OPEC oil supply was expected to tighten more than expected, particularly in the US, with more US oil producers announcing oil production curtailments in May. The US active oil rig count continued to decline sharply, falling by 477 units, or 70%, since mid-March, to only 206 units in the week to 5 June 2020, a consecutive twelve-week drop.

Oil prices consolidated gains in the first weeks of June 2020 and maintained an upward trend to reach their highest value in about three months. Oil prices were supported by optimism on further improving oil market fundamentals and an easing oil surplus in the market, as well as an improving global oil demand picture as COVID-19-related lockdown measures continue to be lifted in many major economies. However, the oil price rally was limited as the market remained cautious about the continuing spread of the COVID-19 pandemic, increasing infection numbers in some countries and concerns about a potential second wave of infections, with infection rates rising in some cities where lockdowns measures had been eased. Furthermore, an elevated level of global oil stocks and the high availability of oil products, as well as rising tensions between the US and China, limited gains. To speak exactly about the period under report, then crude oil prices continued their upward movements and drifted to the highest levels since early March 2020. To give more details, the ICE Brent spot price gained nearly another 10% over last 4 weeks and ended the period above $40 / bbl, while the NYMEX WTI spot price jumped by comparable 10% during the same period of time and closed just below the threshold of $40 / bbl.

As the new OPEC+ historic output agreement to cut oil production by 9.7 mln bbl / d to balance the market in the circumstances of massive demand destruction due to COVID-19 quarantine measures has come into the force since May 1, the cartel reduced its crude oil production by a record amount within the month under review. The OPEC as a whole in May 2020 produced unbelievable 5.84 mln bbl / d less crude oil than it did in April 2020 to satisfy its obligations under the new deal that is equal to -19.2% mom. No doubts, it was the sharpest monthly drop of OPEC’s production rate over the whole history of the cartel. Moreover, in absolute terms a production of crude oil by the cartel collapsed to the lowest level over the decades below the threshold of 25.0 mln bbl / d. Comparing to one year ago level, OPEC’s crude oil output in May 2020 tumbled by more than 5.5 mln bbl / d, or astonishing roughly -18.4% yoy. Every country in the cartel delivered a production cut in May 2020 relative to April 2020, but a monthly rate of output decline varied greatly among different states. The main cutback of crude oil production within the OPEC in May 2020 was obviously made by Saudi Arabia that reduced its output by very formidable 2.89 mln bbl / d in compare to the volume of April 2020, or shocking -24.9% mom. Significant monthly drop of crude oil output within the OPEC in May 2020 was also recorded in Saudi Arabia’s closest allies, namely Kuwait and the UAE. To sum up, these three OPEC’s members all together have delivered more than 80% of the overall cartel’s production cut.

Total oil production worldwide in April 2020 declined by 1.86 mln bbl / d in compare with the volume of March 2020, or -1.9% mom, despite to a serious expansion of crude oil production by several OPEC states. On a year-over-year basis, a dynamic of total oil output around the globe in the month under review was also negative although a rate of change was lesser comparing to the monthly one. To give more numbers, a global oil production in April 2020 was 327 thsd bbl / d lower than it was one year ago in April 2019, or -0.3% yoy. So, severe demand destruction around the whole world due containment measures linked with COVID-19 pandemic turned out to be a more important fundamental factor for the oil market than a wish of some oil producers to punish the others through excessive amount of production. On a single-state level, a production of crude oil in April 2020 was lower than in March 2020 in almost all major non-OPEC producers except for Russia where an output of crude oil in April 2020 increased by 55 thsd bbl / d in contrast to the volume of March 2020, or +0.5% mom. On the other hand, the most severe collapse of crude oil production among non-OPEC states in April 2020 on monthly basis was recorded in such states as the UK where the figure dropped by 213 thsd bbl / d, or horrible -20.9% mom, Canada where a rate of monthly output decline was equal to 643 thsd bbl / d, or -14.6% mom, Australia that lost nearly 55 thsd bbl / d of crude oil extraction, or -14.0%, and Mexico that produces 216 thsd bbl / d less oil in the month under review in compare to the previous month, or -12.4% mom. But the deepest monthly decline of crude oil output in April 2020 in absolute terms was obviously registered in the USA as the largest non-OPEC oil-producing country; the volume of crude oil extracted here dropped by 671 thsd bbl / d, or -5.2% mom.

Total crude oil production in the USA in May 2020 continued to dip down at a rapid pace for the 2nd month in a row after it reached its historical maximum slightly above the threshold of 13.0 mln bbl / d in February and March of this year. To be more precise, the volume of crude oil output in the country within the month under consideration tumbled by another 825 thsd bbl / d in contrast to the volume of April 2020, or 6.7% mom, to the lowest level since October 2018. Despite to a powerful spur in prompt prices of crude oil in May 2020, many US oil producers continued to curb their output to adjust to terrible demand destruction around the world linked with COVID-19 quarantine measures implemented in all major countries. Meanwhile, a cumulative production of shale oil in the USA in May 2020 tumbled more severely in monthly terms comparing to the overall figure. According to the most recent data provided by Rystad Energy, total output of shale oil in the country in the month under review collapsed by 1.24 mln bbl / d relative to the previous month, or formidable -14.1% mom, to the lowest level since summer of 2018. In comparison to one year ago volume, total production of shale oil in the USA in May 2020 dropped a little bit less significant; a yearly rate of decline was equal to 1.03 mln bbl / d, or -12.0% yoy.

The International Energy Agency (IEA) released detailed figures of oil demand in the 1st quarter of 2020. Global oil consumption in the 1^st quarter of 2020 definitely fell sharply both relative to the volume of the previous quarter and to the volume of the 1^st quarter of 2019 as containment measure against COVID-19 pandemic firstly had stunned Chinese economy (February) and later had made a hit to major economies in Europe (March). To be more precise, global oil consumption in the 1^st quarter of 2020 tumbled by 7.2 mln bbl / d in compare to the volume of the 4^th quarter of 2019, or -7.1% qoq, to the level of 93.54 mln bbl / d. Last time comparable figures of total demand for oil worldwide was observed in the middle of 2014 year. The same time, global oil consumption in the 1^st quarter of 2020 in contrast to the level of the 1^st quarter of 2019 dropped by 5.39 mln bbl / d, or -5.4% yoy. So, demand destruction within the period under review was even sharper and more powerful than it was during the Global Financial Crisis of 2008. But it's only child's play to what is on the way. It is also worthwhile to mention that in the previous quarter global oil demand had reached its new historical maximum of 100.7 mln bbl / d.

According to the IEA, new data show that demand destruction in the early part of the year was slightly less than expected, although still unprecedented. Increased mobility indicators in the March-May period provided support: in particular, China’s strong exit from lockdown measures has seen demand in April almost back to year-ago levels. The IEA also seen a strong rebound in India in May, although demand is still well below year-ago levels. In the second half of the year the easing of lockdown measures in many countries should provide a boost. Even so, demand in 2020 is expected to be 8.1 mln bbl / d lower than in 2019, with the biggest declines seen in the first half of the year. The IEA first forecast for 2021 as a whole shows demand growing by 5.7 mln bbl / d, which, at 97.4 mln bbl / d, will be 2.4 mln bbl / d below the 2019 level. This 2.4 mb/d gap between 2021 and 2019 is largely explained by the dire situation of the aviation sector.

Total commercial stocks of crude oil and oil products in OECD states in March 2020 started to climb as more and more countries began to follow the Chinese way to fight against COVID-19 pandemic and to implement various restricting measures which undermined economic activity around the globe. To be more precise, the total volume of commercial stocks of oil in OECD countries in March 2020 increased by 68.3 mln bbl in contrast to the volume of February 2020, or +2.4% mom. On a year-over-year basis oil stocks in OECD countries also went up within the month under review. An annual growth rate was comparable to the monthly one and equal to 82.6 mln bbl, or +2.9% yoy. It should also be noted that the aggregate volume of commercial oil inventories in OECD countries by the end of February 2020 dropped to the lowest level over last 11 months. So, the situation with oil inventories didn’t turn to be dramatic in the month under consideration. However, it became really grim within the following month, namely April 2020. According to the preliminary IEA data for the month, the volume of total oil and oil products inventories in OECD states rose by 148.7 mln bbl (4.9 mln bbl / d) to 3137 mln bbl, and were 208.3 mln bbl above the five-year average.

Total commercial inventories of crude oil in the USA in May 2020 continued to build up and increased by another 4.7 mln bbl relative to the volume of April 2020, or +0.9% mom. However, the speed of inventories expansion in the country decelerated very significantly comparing to the explosive growth rate of stocks in April 2020. Nevertheless, it should be mentioned that commercial inventories of crude oil in the USA continued to go to the North in May 2020 even despite to the fact that the authorities started to relax restriction measure on both federal and regional levels and economic activity within the country has begun to recover at a rapid pace. Moreover, positive dynamic of crude oil inventories took a place not only in circumstances of a stronger demand, but in circumstances of a weaker supply as well as US oil producers started to reduce output to satisfy requirements of the new OPEC+ deal.

However, the inventories of crude oil in the Cushing storage in Oklahoma (the basis for NYMEX WTI crude oil futures) in May 2020 reversed and moved down considerably. To give more details, the volume of crude oil stocks in the Cushing storage in May 2020 fell by 11.7 mln bbl in contrast to the volume of April 2020, or impressive -18.4% mom. Moreover, the figure dipped down below the average level for the month of May over last 5 years. So, fears of traders regarding an overflow of Cushing storage capacities that has led to a negative settle price of NYMEX WTI crude oil futures in April 2020 turned out to be unjustified. Nevertheless, relative to the end of February level, the inventories of crude oil in the Cushing storage in May 2020 was nearly 40% higher.

Total floating inventories of crude oil around the globe continued its expansion in May 2020 for the 3rd month in a row and rose by another 10.6 mln bbl relative to the level of the previous month, or +6.8% mom. In absolute terms the volume of the stocks reached the level of 166 mln bbl that is the highest level 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 May 2020 experienced much more impressive performance relative to the monthly one. To be more specific, the volume of floating inventories in May 2020 was 110.2 mln bbl higher than it was one year ago in May 2019, or nearly +200% yoy. The most significant monthly expansion of crude oil inventories that held of floating storages in absolute terms in May 2020 was again recorded in the Asia region, where the volume of floating inventories grew up by formidable 17.4 mln bbl relative to the level of the previous month, or roughly +25.8% mom.

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06 2020, Arbat Capital

oil, investment

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