14
May
2020

‘Eye-popping’ US and Saudi shut-ins helping to balance global oil market – IEA

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The global oil market is showing incipient signs of recovery from last month’s extreme turmoil thanks largely to supply-side curtailments led by US producers, many of whom fell out of the money when crude prices crashed to multi-decade lows. The International Energy Agency (IEA) said today that US shut-ins could hit 2.8 million barrels/d by end-2020 even if OPEC+ producers fully comply with their agreement to collectively remove 9.7 million barrels/d from the market.

The IEA said in its monthly oil market report for May that countries outside the OPEC+ agreement, led by the US and Canada, are curtailing volumes “faster than expected”, as “market forces have demonstrated their power and shown that the pain of lower prices affects all producers”.

Non-OPEC+ production was 3 million barrels/d lower in April than at the start of the year, and in June that drop could reach 4 million barrels/d “with perhaps more to come”, the report states.

With the OPEC+ agreement now in full effect, Saudi Arabia pledging to throttle back an additional 1 million barrels/d on top of that and the United Arab Emirates (UAE) and Kuwait following suit with extra cuts of their own, the IEA estimates an “historic” month-on-month reduction in global supply in May of 12 million barrels/d.

Saudi Arabia is on course to cut its crude supply by an “eye-popping” 3.4 million barrels/d in May plus the voluntary reduction of 1 million barrels/d for June. Saudi output would be 0.9 million barrels/d lower by end-2020 compared to the year-ago period “assuming 100% compliance with the OPEC+ deal and that the additional voluntary cut applies only to June”.

On this basis, Russian production will be 1.3 million barrels/d lower at year-end than end-2019, the IEA added. But US curtailments top them both, at 2.8 million barrels/d by end-2020. This figure could increase if, as is expected, OPEC+ compliance is less than absolute.

OPEC+ producers will discuss on 10 June whether to allow cuts to ease by 2 million barrels/d over July-December or extend the deeper May-June cuts through the rest of 2020. If the latter prevails and voluntary cuts are also extended, Saudi production in Q4’20 could fall 2.5 million barrels/d below a year ago.

Demanding times

Global oil demand hit a nadir of 25.2 million barrels/d lower year-on-year in April as “more than 4 billion people were subject to some form of confinement” due to Covid-19 lockdowns. The fall should narrow to around 21.5 million barrels/d in May and 13 million barrels/d in June as governments progressively reopen their economies, the IEA said.

The agency has raised its demand estimates for Q2’20 by circa 3.2 million barrels/d on evidence of “stronger than expected mobility in some European countries and the US” plus China’s recovery. “Together, these moves suggest that the decline in oil demand during 1H20 may not be as steep as first feared,” it said.

However, a second wave of coronavirus infections would spell bad news. “Our global 2H20 forecast assumes the virus is largely under control at the global level and that containment measures do not return on a significant scale,” the agency said. And even if the virus is contained, certain sectors such as aviation “will continue to suffer through 2H20 and well beyond” from structurally lower mobility as a result of the pandemic.

Global crude oil storage capacity filled rapidly during the extreme oversupply situation in what IEA executive director Fatih Birol termed “Black April”, but steep production cuts and a recovery in refinery runs “should ease the pressure” in the second half of the year, the IEA said.

Global onshore and underground storage capacity is estimated at 6.7 billion barrels across 78 countries, of which 4.6 billion barrels (69%) was used at the end of April. However, this could soon run up against constraints as maximum operational capacity is estimated at 80% – give or take 5%.

Double negative

In the US, a lack of available storage capacity in Cushing, Oklahoma, helped push US crude benchmark WTI deep into negative territory as the May-dated contract expired a month ago. There are fears that June-dated WTI could follow suit, or at least witness similar volatility, when it expires next Tuesday.

The US Commodity Futures Trading Commission yesterday advised exchanges, brokers and clearing organisations to fulfil their respective obligations. The unusual intervention was widely seen as a thinly veiled warning that they must do whatever necessary to prevent WTI from turning negative again – or any other commodity from following suit.

The CFTC told exchanges they must establish and enforce “position limitations or position accountability for speculators” to curb the “threat of market manipulation or congestion” around the delivery point. Oil traders with available storage at Cushing essentially cornered the market when they saw demand for May-dated WTI positions evaporating, plunging the price below zero and leaving contract holders facing huge losses. - SK

Contact the editor:

Sebastian Kennedy
[email protected]

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