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Oil Market Report - October 2020

EXECUTIVE SUMMARY

Crude oil prices around the world moved sharply lower during September 2020, falling on a month-over-month basis for the first time since April, with the ICE Brent benchmark down 7.0% on a monthly average, while the NYMEX WTI benchmark dropped 6.5%. Oil prices came under pressure during the month under review, as market sentiment deteriorated on growing concerns about signs of slowing global oil demand recovery, which was exacerbated by spikes in COVID-19 infections in several regions, including India, the US and many European countries, which could prompt new tighter lockdown measures and more limited mobility. The main forecasters revised down their global oil demand growth for this year. Meanwhile, investors were assessing rising global oil supply, including supply from OPEC and non-OPEC producers participating in the OPEC+ deal, and the gradual return of Libyan crude oil production in September. Furthermore, depressed refining margins, high oil stock levels and refinery turnarounds that resulted in reduced buying interest from refiners also weighed on the market, prompting concerns that a global excess of crude and refined products would delay a long-anticipated rebalancing of the market.

Over the first half of September 2020, oil prices fell by about 13% amid a sharp sell-off in equity markets and deteriorating market sentiment on bleak US job data, which added concerns of a slower recovery in the US economy and oil demand from the COVID-19 recession. Oil prices also fell as the hurricane Laura risk premium that supported oil prices temporarily in late August faded. Disappointing data from China reporting lower crude oil imports in August on a monthly basis and higher oil product exports, as well as a weekly EIA report showing a rise in US crude stocks in the week to September, 4 after six consecutive weeks of declines added concerns about an oversupplied market and pressured prices lower.

In the second part of September 2020, oil prices recouped some losses on the expectation of tightening oil supply amid production disruptions in the Gulf of Mexico caused by a new hurricane Sally, and on an unexpectedly large decline in US crude oil stocks in the week of September, 11, amid improving refining activity and crude runs in the US. Oil prices also found support from the outcome of the meeting of the OPEC+ Joint Ministerial Monitoring Committee (JMMC), which showed a positive performance in overall voluntary production adjustment conformity in August and stressed the importance of adhering to full conformity and compensating for overproduced volumes. However, oil prices resumed their downward trend in late September and early October as concerns about the recovery of global oil demand and a supply overhang predominated. Nonetheless, one more attempt to move to the South was short-lived and during the second decade of October crude oil market finally found some ground to stabilize slightly above $40.0 / bbl level as risk-on mood on equity markets prevailed despite to a grimmer situation with COVID-19 pandemic in many regions of the world.

In September 2020, total output of crude oil in the OPEC as a whole remained nearly the same on a monthly basis and rose insignificantly by 40 thsd bbl / d, or +0.16% MoM. Technically speaking, oil production within the OPEC in the month of September 2020 continued to recover for the 3rd month in a row after a sharp drop in May and June due to OPEC+ historical deal to curb output by nearly 10 mln bbl / d. Nevertheless, in absolute terms total volume of crude oil production by OPEC states in the month under review has remained depressed by historical standards. Despite to the fact that the OPEC+ group transitioned to the 2nd stage of the deal to unwinding output cuts to 7.7 mln bbl / d over the period from August 2020 to December 2020, the cartel as a whole has not improved its crude oil production neither in August, nor in September, partly due to obligations of some countries to compensate their output for overproducing between May and August. According to the 23rd meeting of the OPEC+ JMMC held on 19 October 2020, OPEC+ countries compensated in September 2020 a total of 249 thsd bbl / d to make up for previously overproduced volumes. Movements in volumes of crude oil output in different OPEC states were non-uniform in September 2020 as compared to the value of August. Thus, in absolute terms the most considerable growth of production of crude oil was registered in the state of Iraq, where extraction of oil ramped up moderately by 90 thsd bbl / d, or +2.44% MoM. However, the most significant increase of crude oil output in September 2020 in relative terms was exhibited in Libya, where crude oil production skyrocketed by +87.50% MoM due to very low base level, or +70 thsd bbl / d. Venezuela also demonstrated a significant rise of crude oil output in September 2020 from a monthly movement point of view as well and extended its crude oil production by 90 thsd bbl / d, or +29.03% MoM. On the other hand, the most material decrease of production of crude oil among OPEC states in September 2020 was recorded in the U.A.E, where oil output tumbled by severe 10.37% MoM, or -310 thsd bbl / d.

Total oil production worldwide in September 2020 continued to restore after its collapse in the 2nd quarter and rose by another 526 thsd bbl / d, or +0.7% MoM, relative to the level of August 2020. Notwithstanding to a continued growth in monthly terms over 3 consequent months, in absolute terms the volume of total oil production around the globe in the month under very humiliated from a retrospective point of view. Before current COVID-related crises, comparable amounts of oil were produced in the world as a whole as early as in 2011. So, that was not a surprise that from a year-over-year standpoint performance of total oil output around the globe in September 2020 proceeded to be very discouraging thanks to a preceding collapse of production. More exactly, a global output of oil in September 2020 was 8.3 mln bbl / d lower than it was in the same month of the previous year, or -8.3% YoY. Obviously, the main reason of so enormous collapse of global oil production in yearly terms in the month under review was the historical OPEC+ agreement signed in April 2020 and came into force in May 2020. The larger half of countries demonstrated positive changes of crude oil production in September by comparison with volume of August 2020. In absolute terms, the strongest increase of crude oil production in the month of September was recorded in USA, although oil production in the country went up only modestly by 1.89% MoM, or +194 thsd bbl / d, relative to the level of the prior month. Meanwhile, the most formidable expansion of extraction of oil in relative terms in the month under review was exhibited in Australia, where output of oil expanded by impressive 9.61% MoM, or +12 thsd bbl / d. Such countries as Malaysia and the United Kingdom also demonstrated a significant growth of production of oil in September 2020 on a month-over-month basis, equal to +6.74% MoM, or +32 thsd bbl / d., and +6.88% MoM, or +51 thsd bbl / d, respectively. Only in a small number of non-OPEC oil producing countries crude oil production in September was lower than in the previous month. Thus, the largest decline of production of crude oil in the month under review was registered in Norway. Production of crude oil in Norway felt by 34 thsd bbl / d, or -1.97% MoM, on a monthly basis that is by any means not very substantial.

In September 2020, total oil production in the USA as a whole demonstrated an increase of 0.95% MoM, or +100 thsd bbl / d, on a month-over-month basis, and therefore made the 2nd attempt to reverse over last 4 months. In absolute terms the volume of crude oil output in the USA fluctuated over a couple of months around the threshold of 10.5 mln bbl / d. This print is close to the lowest levels since the 1st quarter of 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 marginally above 13.0 mln bbl / d. Comparing to that record level, crude oil output in the country in September 2020 was lower by 2.43 mln bbl / d, or -18.6%. Notwithstanding to a sustainable recovery of economic activity in the domestic economy and abroad along with upward movement in crude oil prices during last 4 months, US oil producers in general preferred to sit on the sidelines and not to speed up crude oil production, although a considerable part of spare capacities in the USA are more flexible than in the other regions of the world.

Total shale oil output in the USA in September 2020 declined marginally by 36.08 thsd bbl / d, or -0.43% MoM, on a monthly basis that is slightly worse than the performance figure that was demonstrated by total oil production in the country. The opposite picture to one was seen in the prior month when shale oil production in the USA continued to grow despite to a negative dynamic of the overall oil production. In comparison to one year ago volume, the production of shale oil in the USA in September 2020 also declined and was lower by 782.75 thsd bbl / d, or -8.64% YoY, relative to the volume of September 2019. In the month of September, cumulative shale oil output in the USA demonstrated a decline in yearly terms for the 5th consequent month. The most part of shale oil deposits in the USA exhibited a contraction of output of shale oil in the month under review relative to the prior one, except for the fields of Bakken and Permian, although shale oil production growth on these two deposits also was minor.

According to the most recent monthly report by the EIA, global oil demand rose 3.4 mln bbl / d month-on-month (m-o-m) in July 2020, as coronavirus restrictions eased and summer holidays in the northern hemisphere supported a rise in transport fuel demand. However, the demand outlook remains fragile as 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 the EIA again revised down its demand estimates for the 3rd quarter of 2020 (-0.2 mln bbl / d), with weakness seen particularly in North America (including Mexico) and India. However, the overall demand estimate for 2020 remained largely unchanged at 91.7 mln bbl / d (down 8.4 mln bbl / d versus 2019), as is the estimate for 2021 at 97.2 mln bbl / d, (up 5.5 mln bbl / d year-on-year).

Despite to expectations and preliminary estimates, total commercial stocks of crude oil and oil products in OECD states in July 2020 didn’t reversed and expressed a shy expansion of 6.5 mln bbl, or tiny +0.2% MoM, in contrast to the volume of June 2020. A historical deal of OPEC+ countries to curb output by more than 10 mln bbl / d augmented by voluntary supply cuts of some OPEC states (Saudi Arabia and its allies) by another 1.2 mln bbl / d has done its work. On a year-over-year basis, total oil stocks in OECD countries apparently expanded much more substantially comparing to a growth on a monthly basis. An annual growth rate in July 2020 was equal to 285.4 mln bbl, or +9.7% YoY. In absolute terms, the cumulative volume of stockpiles remained above the level of 3.2 bn bbl, and reached the new marginal record high over at least recent two decades. Preliminary IEA data for August and September 2020 confirms the idea the worst point of the crises is probably already behind us, at least from the point of view of oil inventories. In particular, in August 2020 total OECD industry oil stocks finally reversed and fell by 22.1 mln bbl (0.71 mln bbl / d) in monthly terms to 3194 mln bbl, although still were 209.1 mln bbl above their five-year average level. Preliminary data for September show that crude stocks in the US and Japan continued to shrink and fell by 6.5 mln bbl and 1.8 mln bbl, respectively, while those in Europe rose by 3.3 mln bbl. Implied global stocks fell by 2.3 mln bbl / d in 3Q20 and are projected to fall by another 4.1 mln bbl / d in 4Q20.

Total commercial inventories of crude oil in the USA in the month of September 2020 continued to normalize for the 3rd month in a row, although at a slower pace than earlier, and went down by another 6.0 mln bbl, or -1.2% MoM, comparing to the level of July 2020. Despite to the 2nd wave of the COVID-19 epidemic that has struck the USA in the 2nd half of the summer, economic activity within the country proceeded to improve in general during the 3rd quarter at a steady pace. A monthly dynamic of crude oil stocks in the Cushing storage in Oklahoma (the basis for NYMEX WTI crude oil futures) in September 2020 again was not homogeneous with monthly dynamic of total commercial inventories of crude oil in the USA. Thus, stocks of crude oil in the Cushing storage proceeded to growth in the month under review for the 3rd month in a row. In the month of September the stockpiles of Cushing showed an increase by 3.6 mln bbl, or +6.77% MoM, relative to the volume of August 2020. The figure moved well above the average level for this month of a year over last 5 years. Relative to pre COVID-19 level (as of the end of February), inventories of crude oil in the Cushing storage in September 2020 was more than 50% higher.

Total floating inventories of crude oil worldwide in September 2020 proceeded to normalize for the 3rd consecutive month after a rapid expansion during the period from March till June. The volume of inventories of crude oil that held offshore around the globe demonstrated a contraction by 15.8 mln bbl, or -10.11% MoM, in the month of September 2020 in contrast to the volume of the previous month. In absolute terms, the volume of stocks that held on floating storages globally decreased somewhat below the level that was printed in the end of April 2020, close to the threshold of 140 mln bbl. Meanwhile, as for a year-over-year dynamic, total volume of crude oil that held of floating storages in the month of September again was much higher than it was one year ago in September 2019. The stockpiles skyrocketed by 92.4 mln bbl, or +191.81% YoY, so the figure exhibited a rise in yearly terms in the course of 3 quarters in a row.

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