KUWAIT: JULY 12, 2020
OIL RALLY COOLS ON RESURGENT COVID-19
May’s oil rally continued into June, with prices topping three-month highs on increased optimism about the economic outlook and confidence that the oil market was tightening thanks to OPEC+ supply curtailments. Brent reached a high of $43 before closing the month up 16% at $41.0/bbl. However, anxieties about the pace of the oil demand recovery have resurfaced of late as Covid-19 infections surge in post-lockdown US states. Adding to this, there are concerns that global oil demand will never recover to pre-pandemic levels of 100 mb/d in the context of the clean energy transition. Nevertheless, the International Energy Agency (IEA) is still sticking by its forecast of pre-pandemic levels being reached in 2022: in its June oil market report, the agency expects oil demand to contract by 8.1 mb/d this year – one of the most severe contractions on record – before rising by 5.7 mb/d in 2021 to 97.4 mb/d.
On the supply side, OPEC+ in May (the first month of cuts) notched up a reduction of 8.44 mb/d versus the group’s target of 9.7 mb/d, which represents a compliance rate of 87%. The oil producers’ group agreed to extend the two-month duration of these maximum cuts for a further month to end-July, after pressuring serial non-complier Iraq, which only achieved 46% of its target cut, to compensate the group with deeper cuts over the next few months. Supply-side tightness was also helped by further declines in US shale production. Output as of 26 June was estimated at 11 mb/d, down an incredible 2.1 mb/d (16%) from its late February peak. This has coincided with US oil rig counts plummeting to an 11-year low of 185.
Overall, following June’s supply-side curtailments, the narrative has now switched back to oil demand. For oil to break through the lower $40s resistance level, demand will need to recover more quickly. And for that to happen, the global corona pandemic will need to be brought fully under control.