EXECUTIVE SUMMARY

Crude oil prices extended their gains in the month of August 2020, climbing to six-month highs, the levels not seen since February 2020. The ICE Brent and NYMEX WTI benchmarks hovered around $45 / bbl and $42 / bbl with several attempts to move even higher, respectively, amid positive market sentiment fueled by steadily improving market fundamentals and strong conformity levels of OPEC and participating non-OPEC producing countries in the Declaration of Cooperation, which contributed to reducing the market overhang. Crude oil prices were also supported by better-than-expected manufacturing activity data in the US and China that gave some optimism to investors on economic and oil demand recovery. Furthermore, refinery operations and utilization rates continued to recover in August 2020 in the main regions, including China, Japan, South Korea and the EU-16, although they remained below pre-COVID-19 levels. In the second half of August 2020, crude oil markets were also temporarily buoyed by the potential for lower supply from offshore platforms in the Gulf of Mexico ahead of Hurricane Laura, which made landfall in the USGC without causing severe damage to oil infrastructure.

However, the increase in oil prices in August 2020 remained limited amid lingering uncertainties regarding the recovery of economic activity and the sustainability of countries’ opening up amid continuing increases of COVID-19 cases worldwide in the eve of returning from holidays. Signs of weakening oil demand, weaker refining margins as well as softening buying interest from China added downward pressure on prices. Furthermore, investors were assessing expected higher crude supply from OPEC and non-OPEC producers within the framework of the second phase of their production adjustment decision, as well as a faster-than-expected return of tight oil production in the US. All these concerns combined with a sharp sell-off on global stock markets have led to a fierce collapse of crude oil prices during the first week of September. The ICE Brent and the NYMEX WTI benchmarks tumbled to as low as to below $39 / bbl and below $37 / bbl, respectively, or more than 15% from August highs. Nevertheless, the sell-off on oil markets turned up to be short-lived as prices have recovered at rapid pace in the middle of the month as Saudi Arabia showed its determination to protect the recovery at OPEC+ JMMC meeting on September 17 and to force OPEC+ counterparties to deliver their planned supply cuts. Weaker US dollar and a surprise decline in U.S. crude inventories also helped oil prices to move upward during the 3^rd week of September 2020. As for exactly about the period under report, then due to the recent sell-off crude oil prices experienced slightly negative performance over the interval. Thus, the ICE Brent spot price decreased by nearly 1.6% over last four weeks and ended the period under report at $42.8 / bbl, while the NYMEX WTI spot price declined slightly more substantial during the same period of time by 2.9% to $41.0 / bbl as of September 18.

Total crude oil production by the states of the OPEC as a whole during August 2020 went on to recover for the 2^nd consecutive months after a sharp drop in May and June. The cartel built up its crude oil production in the month under review by another 0.55 mln bbl / d relative to the level of July 2020, or +2.4% MoM. Nevertheless, in absolute terms the total volume of crude oil production by OPEC states has remained record low by historical standards. To be more precise, the cartel in August extracted less than 25 mln bbl / d, the amount unseen for more than two decades before COVID-19 pandemic. Naturally, in comparison to one year ago level of production, the OPEC as a whole produced nearly 6.0 mln bbl / d less crude oil in August 2020 than it did in August 2019, or severe -20.0% YoY. The overall monthly growth of cumulative crude oil production by the OPEC states in August 2020 was mostly a result of further expansion of output in Saudi Arabia and its closest allies, namely the U.A.E. and Kuwait. These countries proceeded to restore their production in the month under consideration as their additional voluntary obligations to curb output that were taken in the month of June 2020 expired. The kingdom boosted its production by 410 thsd bbl / d in August 2020 relative to the level of the previous month, or another +4.9% MoM. Even more essential monthly growth of crude oil output in relative terms was observed in the U.A.E., where the amounts of oil produced within the month increased by 200 thsd bbl / d, or solid +8.2% MoM. As for Kuwait, monthly increase of output in this OPEC state in August 2020 was less impressive comparing to ones in Saudi Arabia and the U.A.E. and equal to 50 thsd bbl / d, or humble +2.3% MoM. The same time, a number of OPEC members reduced their output of crude oil in the month of August 2020 in compare to the volumes of July 2020. The main cutback was made by Nigeria and Iraq as these cartel states exceeded their production quotas within three previous month most of all. Iraq had the biggest excess at 851 thsd bbl / d over the three months, while Nigeria was over its cap by 315 thsd bbl / d, according to OPEC+ data outlined in an internal report seen by S&P Global Platts. So, in Nigeria an extraction of crude oil in August 2020 slumped by 110 thsd bbl / d in comparison to the previous month, or -7.3% MoM, while Iraq produced 70 thsd bbl / d less of crude oil than it did one month ago, or -1.8% MoM.

Total oil production worldwide in July 2020 began to restore after its fast and furious collapse in May and June and increased from nearly the lowest level over last decade that was recorded during the previous month by 2.53 mln bbl / d, or +2.3% MoM. Notwithstanding to a solid monthly increase, in absolute terms the volume of total oil production around the globe in July 2020 was equal to slightly less than 87.5 mln bbl / d and, therefore, remained 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 July 2020, naturally, went on to be very discouraging thanks to a collapse of production in two previous months. To be more exact, a global output of oil in July 2020 was 9.6 mln bbl / d lower than it was in the same month of the previous year, or -9.9% YoY. A main gain of crude oil production in July 2020 in comparison to the volumes of June 2020 was exhibited in the USA, where the rate of production jumped by 600 thsd bbl / d, or +5.9% MoM. Thereby, the USA was accounted for nearly one half of monthly growth of the overall crude oil production in non-OPEC states. Material augmentation of crude oil output within the month under review was also recorded in such states as Brazil, Canada and Norway. Thus, an output of crude oil in Brazil in July 2020 rose by 150 thsd bbl / d relative to the previous month, or +5.6% MoM. In Canada crude oil production expanded by 158 thsd bbl / d, or +4.6% MoM, while in Norway a monthly rate of production expansion in July 2020 was equal to 167 thsd bbl / d, or solid +10.8% MoM. Russia, other ex-USSR states, Mexico and Malaysia were also among the countries that ramped up their output of crude oil in the month under review in compare to the previous month. In particular, Russia intensified its crude oil production by 41 thsd bbl / d in July 2020 relative to June 2020, while ex-USSR states pumped 64 thsd bbl / d more crude oil with the same period of time, or +3.3% MoM. By the same token, monthly rates of crude oil output expansion in Mexico and Malaysia were equal to 28 thsd bbl / d, or +1.7% MoM, and 23 thsd bbl / d, or +5.4% MoM, respectively.

Total crude oil production in the USA in August 2020 failed to continue its recovery and again reversed to downside, in accordance with the US DOE data. To speak in details, a volume of crude oil output in the country dropped by another 575 thsd bbl / d in the month under review relative to the volume of July 2020, or troubling -5.2% MoM. In absolute terms the volume of crude oil output in the USA in August 2020 dipped below the threshold of 10.5 mln bbl / d to the lowest level since the 1^st 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 August 2020 was lower by 2.55 mln bbl / d, or -19.6%. 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 prefer to sit on the sidelines and not to ramp 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. Cumulative production of shale oil in the USA in August 2020 experienced an opposite dynamic in contrast to the performance of overall crude oil production in the country. According to the most recent data provided by Rystad Energy, the output of shale oil in the USA in the month under review continued to go up for the 3^rd consecutive month and increased by another 215 thsd bbl / d relative to the volume of the previous month, or +2.8% MoM. However, in comparison to one year ago volume, the production of shale oil in the USA in August 2020 evidently was considerably lower than it was one year ago; a yearly rate of decline was equal to roughly 1.0 mln bbl / d, or troubling -11.3% YoY. So, notwithstanding to positive dynamic of production over several recent months, the level of shale oil output in the USA remained humiliated from a longer term point of view. Unexpectedly, the most tangible growth of production among major US shale oil deposits, both in absolute and relative terms, in August 2020 was exhibited at the oldest deposit, named Bakken. To provide greater details, an output of shale oil at this deposit in the month under review increased by another 94 thsd bbl / d relative to the volume of the previous month, or impressive +9.2% MoM.

Global oil consumption in the 2^nd quarter of 2020 experienced the sharpest drop on records, although final numbers released were somewhat better than initial estimations. It is clearly that so severe oil demand destruction around the globe within the quarter was a result of strict containment measures developed to ease COVID-19 pandemic. During months of April and May more than a half of a population on the Earth was affected by lockdowns and other quarantine-linked restrictions. Hereby, it is not surprising that oil consumption numbers of the 2^nd quarter of 2020 were really awful. To be more precise, global oil consumption within the quarter under review collapsed by 10.85 mln bbl / d, or -11.5% qoq, in compare to the volume of the 1^st quarter of 2020 which also was the worst quarter from oil demand point of view since the middle of 2014. Meanwhile, in contrast to the 2^nd quarter of 2019 global oil consumption in the 2^nd quarter of 2020 tumbled by 16.1 mln bbl / d, or horrible -16.2% YoY. In absolute terms, global demand for oil shrank to the level of 83.23 mln bbl / d unseen for nearly last 15 years. Last time comparable figures of total demand for oil worldwide was observed in 2005 year. In relative terms, demand destruction during COVID-19 pandemic turned to be materially sharper and powerful than it was during the Global Financial Crisis of 2008. As for the 1^st half of 2020 as a whole, global oil consumption within the period dropped by 10.54 mln bbl / d comparing to the 1^st half of 2019, or -10.6% YoY. Meanwhile, the EIA revised down somewhat its estimates of global oil demand in coming quarter in its most recent monthly report. According to the new data, global demand assessments for 3Q20 and 4Q20 were revised to the downside by 0.1 mln bbl / d and 0.6 mln bbl / d, respectively as a result of a resurgence of Covid-19 cases in many countries, local lockdown measures, continued teleworking and the weak aviation sector. For 2020, demand is expected to fall versus 2019 by 8.4 mln bbl / d, more than the 8.1 mln bbl / d seen by the agency in the last month. In 2021, demand is forecasted grow by 5.5 mln bbl / d.

Total commercial stocks of crude oil and oil products in OECD states in June 2020 proceeded to grow, although a rate of expansion relative to the previous month continued to slow. 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. According to the most recent data from the IEA, in June 2020 oil demand finally exceeded oil supply, and for the rest of the year there is an implied stock draw, although this fundamental shift has not been reflected in numbers for the months under consideration. Total volume of commercial stocks of oil in OECD countries in the month of June expanded by another 16.2 mln bbl in contrast to the volume of May 2020, or +0.5% MoM. 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 June 2020 was equal to 297.0 mln bbl, or +10.1% YoY. In absolute terms, the cumulative volume of stockpiles went up beyond the level of 3.2 bn bbl, reaching the new record high over at least recent two decades. Preliminary IEA data for July and August 2020 confirms the idea the worst is behind us, at least from the point of view of OECD oil inventories. In particular, total industry crude stocks fell in all three regions: -19.3 mln bbl in the US, -9.8 mln bbl in Europe and -1.3 mln bbl in Japan (in total, nearly 1 mln bbl / d). Also, in August 2020 volumes of crude in floating storage fell sharply by 59.9 mln bbl (1.93 mln bbl / d) to 168.4 mln bbl, but early reports suggest volumes might rise in September.

Total commercial inventories of crude oil in the USA in August 2020 proceeded to normalize after their powerful expansion during the period of March-April 2020 and shrank by another 20.2 mln bbl, or -3.9% MoM, comparing to the level of July 2020. The month of August became the 3^rd month in a row of declining crude oil stockpiles in the USA. Despite to the 2^nd wave of COVID-19 epidemic that has struck the USA in the middle of this summer, economic activity within the country went on to recovery in July and August at a rapid pace. Therefore, demand for oil products in the USA also continued to expand relative to the levels that were observed during the period when strict quarantine measures were released. Hereby, US refineries proceeded to ramp up their production during the month under review to meet growing domestic demand. Crude oil stocks in the Cushing storage in Oklahoma (the basis for NYMEX WTI crude oil futures) in August 2020 again showed opposite monthly dynamic relative the performance of total commercial inventories of crude oil in the USA. Despite to continued contraction of the overall crude oil inventories in the country, stocks of crude oil in the Cushing storage proceeded to growth in the month under review for the 2^nd month in a row, though this time not materially. The volume of the stockpiles expanded by 0.6 mln bbl relative to the volume of the previous month, or insignificant +1.1% MoM. So, the figure remained above the average level for this month of a year over last 5 years. Relative to pre COVID-19 level of the end of February, inventories of crude oil in the Cushing storage in August 2020 was nearly 40% higher.

Total floating inventories of crude oil worldwide in August 2020 proceeded to normalize finally after rapid expansion within the four months long period since March 2020 till June 2020 and went down by another 21.7 mln bbl relative to the level of the previous month, or -12.0% MoM. In absolute terms, the volume of stocks that held on floating storages around the world decreased close to the level that was observed previously in the end of April 2020, or below the threshold of 160 mln bbl. Meanwhile, as for a year-over-year dynamic, total volume of crude oil that held of floating storages in the month of August 2020, obviously, was much higher than it was one year ago in August 2019. To give more numbers, a volume of floating inventories with the month under report exploded by nearly 100 mln bbl in compare to the same month of the previous year, or roughly +180% YoY.

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09 2020, Arbat Capital

oil, investment

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