After the extraordinary swings in the oil markets in H1 this year, the supply demand has since then improved remarkably.
A big, new Opec+ agreement saw a 9.7 mbpd cut come into effect in May and now extended through July. To date, monthly compliance has averaged 96 per cent. More recently, a July meeting of the JMMC agreed to taper cuts to 7.7 mbpd from August through to the end of the year (a further reduction to 5.8 mbpd is then planned through Q1 2022). The effective cut could be nearer to 8-8.5 mbpd for August/September if the suggestion that serial non-compliers such as Nigeria and Iraq make up for any shortfalls in compliance in May and June, Thom Payne, Head of Offshore, Rigs & Wells, Westtwood Global Energy Group, said.
Westwood now estimates that overall oversupply for H1 was 7.6 mbpd. However, the subsequent rapid reduction in output, coupled with US-led demand recovery, has now likely seen the global oil market flip to a net draw position of 1.3 mbpd in June. This switch to an undersupplied market will be critical to eroding the estimated 1.2 billion barrels of excess supply accrued in storage between January and May. This process looks to have already begun. According to the IEA, oil in floating storage fell by 16 per cent in June.
The outlook, of course, remains a minefield of uncertainty. On the supply side the two burning questions will be the ability of Saudi Arabia to continue to marshal cut-compliance if oil prices continue to rise, as well as the ability of US output to recover at $40-45 per barrel WTI. Whilst the CEO of Parsley Energy, Matt Gallagher, recently declared that US production will not reach 13 mbpd again in his lifetime (he’s only 37!) others such as Noble, Continental & ConocoPhillips have already announced their intention to bring back some of the capacity curtailed over March-June.
On the demand side, the outlook is even more up in the air. The most recent IEA demand outlook suggests that whilst the height of demand destruction back in April may not have been as bad as first thought, third quarter recovery will now likely be slower than previous estimates, as China reduces its strategic crude purchases and regional lockdowns threaten OECD economies once more. Even by Q4, consumption is likely to retain at least a 3-4 mbpd kerosene-shaped hole year-on-year due to international quarantines and a reduced appetite for air travel.
Westwood estimates that Q3 could see an average draw of 5.2 mbpd over the balance of the year, dropping to 1.6 mbpd for H1 2021. This assumes Opec+ compliance remains above 95 per cent, and US oil production grows only marginally and that the IEA’s latest demand projection plays out. Under this scenario the supply glut would be eroded to pre-pandemic levels by August of next year. This should support oil prices moving to the $50-$55 per barrel range in 2021. Beyond this, the uncertainties multiply, not least the potential 4.2 mbpd of exports that are currently off the market from Iran, Libya and Venezuela, which loom large and may yet derail any price recovery in the next couple of years.