Oil Prices Rebound As U.S. Inventories Dwindle

18 August 2020:Traders remain concerned about the increasing number of COVID-19 cases in many parts of the world including the United States, India and Brazil. The rise in infections continues to have a negative impact on global oil demand in August.

Last week, India had reported its fifth consecutive y/y decline in oil consumption with July’s figures showing a 11.7% y/y decline in refined product consumption. This includes a decline in diesel and gasoline consumption by 19.3% and 10.3% y/y, respectively, leading to Indian refineries to operate below their capacity in the financial year 2020-21.

OPEC and the IEA slashed their oil demand outlook in 2020 by 0.1 million bbl/d and 0.14 million bbl/d, respectively last week. Both reports which predicted a decline in crude demand by 9.1 million bbl/d and 8.1 million bbl/d, respectively weighed on positive sentiment, and kept oil prices in check.

OPEC now forecasts global oil demand to reach 90.6 million bbl/d, only 0.38 million bbl/d above our forecast, while the IEA forecasts global oil demand to be 91.9 million bbl/d in 2020. The IEA also sees oil demand standing at 93.8 million bbl/d in Q3 and 96.7 million bbl/d in Q4 which is slightly higher than CMarkits’ forecast of 92.33 million bbl/d and 94.33 million bbl/d in Q3 and Q4, respectively.

The weakest recovery continues to be in the jet fuel demand with July figures showing the number of aviation travelled kilometres 67% below pre-crisis levels. That may translate into a total jet fuel demand of 4.8 million bbl/d in 2020 which is 39% below the 2019 level, according to the IEA.

Furthermore, the EIA STEO released last week forecasts that global consumption of petroleum and liquid fuels will average 93.1 million bbl/d in 2020, down 8.1 million bbl/d y/y. This includes an expected average demand of 93.4 million bbl/d in July, which is a bit higher than our forecast of 90 million bbl/d. The US oil demand in Q2 is expected to have averaged 16.2 million bbl/d closely matching our forecast of 16.14 million bbl/d. Furthermore, the EIA lowered its US production forecast by 0.37 million bbl/d to an average production of 11.3 million bbl/d that is 0.4 million bbl/d below our previously published forecast.

On the other hand, last week’s prices were supported by the EIA report which showed that commercial crude inventories continued to shrink, with a drop of 4.5 million barrels w/w to stand at 514.1 million barrels. This was also combined by a decline in gasoline and distillates inventories by 0.7 million barrels and 2.3 million barrels, respectively. U.S. oil production saw a major weekly drop of 0.3 million bbl/d, and the decline in rig count also continued as Baker Hughes reported that the total number of oil rigs fell by 4 for to stand at 172, a number that could be set to fall even lower.

In terms of demand, U.S. demand reached 19.37 million bbl/d, the highest number since the outbreak of the COVID-19 crisis last March. Our forecast for US crude oil demand stands at 18.79 million bbl/d in Q3 and 19.19 million bbl/d in Q4, supported by encouraging EIA data.

According to Platts, OPEC-10 achieved a total compliance of 94% in July. Iraq’s production in July stood at 3.77 million bbl/d, up by 0.07 million b/d m/m, leading to a compliance of 83%, down by 7% m/m. On the other hand, Angola met its commitment with production of 1.17 million bbl/d in July achieving a 103% compliance compared with production of 1.22 million bbl/d in June with an 89% compliance. Nigeria’s compliance also improved by 5% as its production declined by 0.02 million bbl/d m/m to stand at 1.56 million bbl/d in July.

For the non-OPEC countries, compliance has been much better compared with the OPEC-10 with compliance in July standing at 99% compared with 94% compliance from the OPEC-10 leading to a total compliance of 96% for the OPEC+ in the month of July. The decline in compliance from the non-OPEC group is attributed to rising production in Russia, which increased output by 0.09 million bbl/d m/m leading to a compliance of 96% in July compared with 100% in June.

Nigeria is currently seeking exemption of its ultra-light Agbami crude to be considered as a condensate by IOCs, an issue that is not new for OPEC. In 2017, Nigeria had sought exemption of its Agbami crude when it had to stick to a production limit of 1.8 million bbl/d, reporting almost 450 thousand bbl/d of condensates, according to national figures, significantly higher than external estimates of 200-250 thousand bbl/d. In 1989, OPEC defined crude with an API higher than 50 as condensates. Yet, it is often hard to track condensate production and distinguish them from crude oil, as condensates can be blended with crude oil.

Condensates are a mixture of light hydrocarbons, composed of NGLs and naphtha with an API of 45 to 120. It is naturally separated from natural gas upon production when its temperature and pressure decline to atmospheric conditions. Condensates are normally priced lower than crude oil as they contain more LPGs and light naphtha, yet some condensates are priced higher than crude oil itself because they contain up to 40% jet fuel and diesel with lower yields of residual fuels.

According to Equinor, Agbami is classified as an ultra-light low-sulphur crude with an API density of 47.9, unlike Akpo, with an API of 46, which is classified as condensate by Total. Production of the Agbami crude ranges between 160 thousand bbl/d and 250 thousand bbl/d, and the majority of it is exported to China, India, Australia, Spain, Netherlands, and Brazil.

If OPEC exempts Nigeria’s Agbami crude, as the case with Russia, then around 160 thousand bbl/d of production will be removed from Nigeria’s official production number, leading to a rise in compliance to 103% from just 65% in July. Other African producers namely Congo, Equatorial Guinea, and Gabon continue to produce well above their production targets, which continues to affect the group’s total compliance rate, an issue that we expect to be on the agenda of the next JMMC.