OIL markets are coming closer to balance sooner than forecast due to the faster recovery of demand and greater declines in production.
Initial oil consumption data and additional efforts by major oil producers indicate that the oversupply in global oil markets has not been as severe as forecast by the US Energy Information Administration in the May.
Early indicators of petroleum consumption have shown increases from the low April levels as US states and countries in the Organisation of Economic Co-operation and Development began to reopen from lockdown.
The front-month futures price for Brent crude oil settled at $39.99 per barrel on June 4, an increase of $13.55 per barrel from May 1. The front-month futures price for West Texas Intermediate crude oil for delivery at Cushing, Oklahoma, increased by $17.63 per barrel during the same period, settling on June 4 at $37.41 per barrel.
The Energy Information Administration's energy outlook for June estimates that the global consumption of petroleum and other liquid fuels averaged 82.9m bpd in May, up 3.7m bpd from April consumption and 2.9m bpd higher than its forecast last month.
Global oil production has also been declining due to voluntary production cuts from members of the Organization of the Petroleum Exporting Countries and partner countries (OPEC+) as well as from rapid declines in the US production of tight oil.
The EIA’s estimate of global liquid fuels supply is 500,000 bpd lower than forecast in its May. Besides OPEC+’s initial production cuts of 9.7m bpd, Saudi Arabia, Kuwait, and UAE announced extra reductions of about 1.2m bpd for June 2020.
As a result, it has revised down the forecast for supply of petroleum liquids globally during June by 2.2m bpd compared with last month’s forecast.
Upward movement
The forecast came before the June 6 announcement by OPEC+ that it would extend production cuts from May and June through July. Ahead of this decision, talks of extended production management contributed to higher crude oil prices.
The EIA's latest energy outlook does not reflect an extension of the May and June cuts. It now expects monthly Brent prices will average $37 per barrel during the second half of 2020 and rise to an average of $48 per barrel in 2021.
The forecast of rising crude oil prices reflects expected reductions in global oil inventories during the second half of 2020 and on into 2021.
The administration expects that high inventory levels and spare crude oil production capacity will limit upward price pressures in the coming months, but as inventories decline into 2021, those upward price pressures will increase.
It forecasts that demand for global petroleum and liquid fuels will average 83.8m bpd in the second quarter of 2020, 16.6m bpd less than the same period in 2019. The lower demand is a result of shutdowns throughout much of the world related to the current pandemic.
With the easing of stay-at-home orders, liquid fuels consumption is expected to rise to an average of 94.9m bpd in the third quarter – but still down 6.7m bpd year-on-year.
Consumption of petroleum and liquid fuels globally is expected to average 92.5m bpd for all of 2020, down 8.3m bpd from 2019, before it increases by 7.2m bpd in 2021.
The supply of liquid fuels globally is expected to average 92.6m bpd in the second quarter of 2020, down 7.9m bpd year-over-year. The declines reflect voluntary supply cuts by OPEC+ as well as reductions in US drilling activity due to low oil prices.
Oil supply fell by less than demand in the second quarter, and EIA expects that supply will be slower to increase.
In its June outlook, the global supply of oil declines to 92.0m bpd in the third quarter before rising to an annual average of 97.4m bpd in 2021 – driven largely by OPEC.
Global liquid fuels inventories are expected to grow by an average of 2.2m bpd in 2020. Inventories rose from January through May at an average rate of 9.4m bpd.
The increases, which peaked in April, came from a sharp decline in global oil demand due to widespread travel limitations and reduced economic activity.
Global oil inventories at the end of May stood at 1.4bn barrels more than at the end of 2019, but EIA expects the inventories will begin declining in June, a month earlier than previously forecast, with draw-downs continuing through the end of 2021.
The draw-downs, which have come sooner than expected, result from sharper declines in global oil production during June as well as higher global oil demand than previously expected.
Global liquid fuels inventories are expected to fall at an average rate of 2.5m bpd from June 2020 through the end of 2021.
US liquid fuels consumption is expected to average 15.7m bpd in the second quarter of 2020, down 4.6m bpd from the same period in 2019 due to travel restrictions and reduced economic activity related to coronavirus mitigation efforts.
The largest declines in US oil consumption have already occurred and demand is expected to rise during the next 18 months.
US liquid fuels consumption is expected to average 18.4m bpd in the third quarter of 2020 before rising to an average of 19.5m bpd in 2021. While that level is 1.4m bpd more than EIA's forecast 2020 consumption, it is 1m bpd less than the 2019 average.
Declines in US liquid fuels consumption vary by product.
Jet fuel consumption is expected to fall by 64% year-over-year in the second quarter of 2020, while gasoline consumption will be down by 26% and distillate consumption will decline by 17%.
The consumption of all three fuels is expected to rise in the third quarter and into 2021 but will remain lower than levels in 2019.
US crude oil production is estimated to have fallen from a record 12.9m bpd in November 2019 to 11.4m bpd last month, with energy technology firm Baker Hughes reporting the fewest active US drilling rigs since it began keeping records in 1987.
US crude oil production is expected to continue to decline to 10.6m bpd in March 2021 before increasing slightly through to the end of 2021.
US crude oil production is expected to average 11.6m bpd in 2020, down 700,000 bpd from 2019 – the first annual decline since 2016.
In 2021, EIA expects US crude oil production will average 10.8m bpd. Its latest short-term energy outlook was issued with the caveat that the forecast remains subject to "heightened levels of uncertainty" because mitigation and reopening efforts related to coronavirus "continue to evolve".
