The oil market bulls may have as much cabin fever as road users. The first sign of positive news and oil prices jumped over $10/barrel in a week in lockstep with drivers getting into their cars as some travel restrictions ease. But the road to recovery is likely to be long and bumpy.
Gasoline consumption is a proxy for oil demand in many key countries – from the US to India – and there are tentative signals offering encouragement as some lockdown measures loosen. In the US, gasoline demand has climbed more than a third since its low at the start of April. Meanwhile, in India, fuel demand started recovering in the second half of April, with oil minister Dharmendra Pradhan confirming the pickup.
S&P Global Platts Analytics estimates gasoline demand destruction in the broader Asian region, excluding China, probably peaked in April, with a year-on-year decline of 17% or 700,000 barrels per day (b/d). And a slow recovery will likely emerge in May.
Indeed, the recovery in oil demand is set to be U-shaped, assuming the world does not see a second wave of Covid-19 infections. Even concerns around global oil storage have eased, as indicated by freight rates falling back after they spiked to record highs in April, shipping sources have told Platts. More and more crude and its products are being stowed away in tanks on land and vessels at sea, but the global market may just about continue to make room for the excess, albeit at a tight squeeze.
The supply side of the ledger also makes a case for a faster rebalancing in the oil market after an April awash with crude.
OPEC and its allies, including Russia, have embarked on a record production cut deal of almost 10 million b/d from May 1, after turning up the taps in April. OPEC produced 30.79 million b/d last month, an increase of 1.82 million b/d from March and the most since February 2019, according to Platts’ closely observed survey.
And there are set to be more cuts on top of this.
Some 5 million b/d in cuts have been announced from elsewhere around the globe, including almost 2 million b/d in reductions from the US and 1 million b/d from Canada. Norway, not part of the so-called OPEC+ accord, has said crude production would be cut by 250,000 b/d in June and 134,000 b/d through the second half of the year.
But the size of the task is daunting. Over the next couple of months, approximately 13 million b/d of oil needs to be shut in, suggesting OPEC and friends will need to stay extremely disciplined and production cuts from elsewhere will need to make up the rest.
The OPEC deal, which exempts Iran, Venezuela, and Libya, commits the other 10 member countries to a collective ceiling of 20.60 million b/d for May and June. That will require those 10 members to slash their output by 7.47 million b/d -- about a quarter of their April production. They are making all the right noises, with OPEC's core Gulf members Saudi Arabia, the UAE, and Kuwait on Monday announcing voluntary additional crude oil production cuts in June, to levels not seen for a decade or more. Saudi Arabia's energy ministry has directed state oil company Aramco to pump 1 million b/d below its OPEC+ quota of 8.492 million b/d in June, the official Saudi Press Agency reported Monday.
And looking further afield, Platts Analytics maintains its view that prices must remain in the $10-15/barrel range in the short-term in order to continue to encourage curtailments. But with prices having doubled that number of late, the oil market could lie betwixt and between – high enough to keep supply hobbling along but low enough to continue inflicting pain on those very same producers.
While some in the oil market are pinning their hopes on $60/b oil by the end of the year, the reality is that the route back to those kinds of values could have some way to go. Don’t forget the optimism in demand needs to be balanced with the prospect that any economic rebound will be modest at best.
Take Asian countries, including South Korea and China, which are seeing a pickup in demand as they put the worst of the pandemic behind them. They are still facing a sharp economic contraction and rapid rise in unemployment. In the US, the exponential rise in unemployment – roughly 20% of the US workforce has applied for jobless claims since early March – is likely to prevent a return to pre-pandemic demand levels any time soon.
So while the market expects prices to soar by end-2020, Brent prices are more likely to trade between $15/barrel and $40/barrel in the short-to-medium term. The oil market could be stuck in the slow lane even as drivers get back into their cars.
London-based Paul Hickin is an associate director at S&P Global Platts. Views are his own.