Demand pulls oil price
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Demand likely has — or will soon — exceed supply; aviation demand remains weak
Oil prices continue to hover in the $40 to $45 range and are trending higher as inventories are drawn down by increasing refinery throughput coupled with falling inventories of gasoline and distillates.
Benchmark prices moved sharply higher Aug. 12, led by West Texas Intermediate rising $1.06 to $42.67 per barrel, while Brent rose 93 cents to $45.43 and Alaska North Slope crude rose 91 cents to $43.91.
The Energy Information Administration said refinery rates ventured above 80% for the first time since March coronavirus lockdowns, erasing 4 million barrels of U.S. crude supplies.
The numbers present compelling evidence that oil demand is in recovery from lockdown lows.
Some prognosticators suggest that the supply vs. demand situation is reversing.
Bloomberg reported Aug. 12 that Standard Chartered PLC said demand may exceed supply for the first time in a year in August, with U.S. demand key in deflating inventories, and that OilX sees the market now in deficit.
But caution is warranted as the partial return of curtailed OPEC+ oil production now underway may undermine prices until demand balances with that rising supply. Demand may not cross above supply until December if recent projections by Rystad Energy hold true.
Saudi Aramco is confident that demand is in recovery mode, and it put its money where its mouth is, committing to pay $75 billion in dividends this year, even as profit fell and debt surged higher.
“We are seeing a partial recovery in the energy market as countries around the world take steps to ease restrictions and reboot their economies,” the company said Aug. 9 in its second quarter and half-year 2020 results report.
Aramco CEO Amin Nasser said forward visibility remains cloudy, but Aramco’s business and strategy in the third quarter is sound.
Oil consumption in Asia, Aramco’s largest regional market, has recovered to near pre-coronavirus levels, he said.
Aramco supplies a significant share of world production, having achieved a historic highest single day crude oil production of 12.1 million barrels on April 2, according to its Aug. 9 report.
Aramco remains profitable. Its share price has declined 6.2% this year - while prices of other oil majors have swooned. The group is bracketed by Shell, down 50%; and Chevron, down 27%.
Air travel slow to take offAir travel continues to be the weak link in recovery for oil demand.
The International Energy Agency warned of further weakness in aviation fuel demand, which led to cuts in its global oil demand forecasts for 2020 and 2021.
“Jet fuel demand remains the major source of weakness,” the IEA said in its August oil market report.
The agency said revised data showed that in April the number of aviation kilometers traveled plummeted 80% versus 2019, and in July the deficit was still 67%.
“With few signs that the picture will improve significantly soon, we have downgraded our estimate for global jet fuel and kerosene demand,” it said.
The agency said 2020 aviation demand will be 4.8 million bpd, or 39% below the 2019 level, and in 2021 the year-on-year recovery will be just below 1 million bpd.
As such, the agency revised its the total 2020 oil demand picture from a decline of 7.9 million bpd to 8.1 million bpd. For 2021, it reduced the expected rebound in growth to 5.2 million bpd from 5.3 million bpd.
The demand for passenger service continues as the weak spot for aviation fuel demand.
The International Air Transport Association said July 30 that it does not expect air passenger traffic to recover to 2019 levels until 2024.
“Air travel reached a turning point in April, with signs of a very modest improvement in May and June,” the IATA said. “Overall, air travel demand is down by 58.4% in the first half of 2020 compared to the same period of last year.”
Non-OPEC players in focusOn the supply side, the major new data point was for production in the United States, the IEA said.
In May, crude output fell 2 million bpd from April’s level to 10 million bpd, 2.9 million bpd below the all time high seen in November, the agency said.
WTI prices have averaged around $40 per barrel since mid-June with little volatility, and U.S. production is starting to rise, it said.
Canada is also seeing production rising and in June output was nearly 5 million bpd, although still about 0.9 million bpd below the peak at the end of 2019, the agency said, adding that Brazil production is also moving upward.
However, the agency was cautiously sanguine about the impact of the OPEC+ rollback of its output cuts.
In July, Saudi Arabia withdrew its voluntary 1 million bpd cut and changes in production elsewhere saw OPEC+ output increase by a net 1.3 million bpd, the agency said.
Significantly, the agency said general OPEC+ production increases beginning in August may be offset by some individual members.
“If countries that have not hitherto complied with their quotas cut back by enough to bring them into compliance, global oil supply would not necessarily increase significantly,” the agency said.
“Our balances show that in June demand exceeded supply, and for the rest of the year there is an implied stock draw,” it said. “However, ongoing uncertainty around demand caused by Covid-19 and the possibility of higher output means that the oil market’s re-balancing remains delicate.”