Analysts at BofA Global Research still expect the global oil market to move into a 4.9mn b/d deficit in 4Q20 on the back of the OPEC+ cuts, supporting crude prices. Yet diesel and jetfuel/kerosene make up by far the largest petroleum product group in the oil market. So crude oil prices cannot really rally until distillate demand, jet fuel included, recovers to more normal levels in the next few months.
It will take three years for global oil demand to recover from Covid to its new normal assuming we have a vaccine or a cure. According to estimates from BoA Global Research, long term oil demand will peak at 105 million barrel/day by 2030 on electric car proliferation, and then decline to 95 mn bd by 2050. If heavy vehicles also switch to alternative fuel, electric or more likely hydrogen, demand could drop to 76 mnb/d by 2050.
Darwei Kung (DWS) | The oil rally continues. On the supply side, OPEC and Rus-sia reached an agreement to extend the June production cap into July instead of implementing the planned scaling down of cuts. This is perhaps a sign that the major produc-ers are conscious of the oil market’s fragility despite the recent rise in oil prices. Large inventory overhangs support that fear. On the demand side, the re-opening of economies across the globe has brought significant optimism, even though the amount of realized demand that has emerged give little support for it.
OPEC+ agreed over the weekend to extend the cut in oil production until July 31. Mexico has not signed up to the new agreement. The return of 2 million barrels of crude oil to the daily supply will be postponed until that date. In addition, it was determined that Iraq and Nigeria, which have so far failed to comply with the agreed production cuts, will carry out an additional reduction in July.
Renta 4 | Finally OPEC+ may have reached a tentative agreement to extend production cuts and the member countries could meet as soon as this weekend to sign it. Saudi Arabia and Russia wanted a firm commitment from those countries which were evading their quotas. So they have finalised an accord with Iraq to meet not only its share of the cuts, but even to compensate for past breaches.
BofA Global Research | The collapse in global oil benchmarks and weak North American differentials forced US and Canadian E&Ps to quickly dial back activity in order to avoid the cash burn from negative operating margins. Producers shut-in output, choked back wells, deferred completions and well starts, and pulled forward or extended oil sands maintenance to avoid exposure to low prices. In total, May oil curtailments may have exceeded 2.5mn b/d across the US and Canada and many producers pre-maturely announced plans for additional shut-ins during June. Since many of these plans were unveiled, oil prices have strengthened to levels where shutting-in no longer makes sense and should actually encourage producers to quickly restore production. For this reason, we expect June curtailments, particularly in the US, to be a fraction of the previously announced levels.
Caixabank Research | A fall in the price of oil provides a boost to the economy of countries that are net importers of crude oil, as is the case for Spain. Cheaper oil equates to an increase in the real disposable income of households, such that it also supports aggregate consumption. However, the health crisis that has gripped us following the COVID-19 outbreak will result in this boost derived from a lower oil price not being reflected in the economy, at least for the time being.
Bank of America Global Research | Oil futures have collapsed by more than 60% since the start of the year, with the WTI front month contract testing $20/bbl several times in recent weeks. The dramatic decline in prices is attributable in part to the oil price war, but the primary driver has been demand. As coronavirus fears forced governments around the world to shut down their economies, demand for refined products has been hit particularly hard.
Alphavalue | One might wonder why equity investors bet on being long on oil last week when the Brent was reaching new lows. In fact on Tuesday, Brent prices hit 20-year lows in the $22/barrel range. It could be one of the surprising examples of how much risk can be taken when there is talk about, or hopes for, stimulus. At that point, even the strongest fundamentals tend to be ignored.
Nitesh Shah (Wisdom Tree) | With the coronavirus spreading around the world, the market is understandably scared that demand for crude oil will fall hard this year. Brent oil prices have fallen from a peak of US$68/barrel in the first week of January to US$56/barrel currently (24/02/2020). We believe that the backwardation in the Brent oil futures curve is generated by the fact that OPEC is ready to intervene.