Traders continue to worry about the growing number of COVID-19 cases in many parts of the world, including the United States, India and Brazil. The rise in infections in August still has a negative impact on global oil demand.
Last week, India reported its fifth consecutive y / y decline in oil consumption with figures from July showing an 11.7% y / y decline in refined product consumption. This includes a decrease in consumption of diesel and petrol by 19.3% and 10.3% y / y, respectively, leading to Indian refineries to operate below their capacity in fiscal year 2020-21.
OPEC, IEA and EIA lower their demand forecast
OPEC and the IEA reduced their outlook for oil in 2020 by 0.1 million bbl / d and 0.14 million bbl / d, respectively, last week. Both reports predict a decline in crude demand of 9.1 million bbl / d and 8.1 million bbl / d, respectively, weighing on positive sentiment, and keep oil prices in check.
OPEC now predicts global oil demand to reach 90.6 million bbl / d, only 0.38 million bbl / d above our forecast, while the IEA predicts that global oil demand will be 91.9 million bbl / d by 2020. The IEA also sees oil demand at 93.8 million bbl / d in Q3 and 96.7 million bbl / d in Q4 which is slightly higher than CMarkits’ forecast of 92.33 million bbl / d and 94.33 million bbl / d d in Q3 and Q4, respectively.
The weakest recovery remains in the demand for jet fuel, with figures from July showing the number of aviation trips kilometers 67% below pre-crisis levels. That could translate into a total demand for jet fuel of 4.8 million bbl / d by 2020, which is 39% below the 2019 level, according to the IEA. Related: Investors are looking to China to find the next Tesla
Furthermore, the EIA STEO last week published forecasts that global consumption of petroleum and liquid fuels will average 93.1 million bbl / d in 2020, 8.1 million bbl / d down y / y. This includes an expected average demand of 93.4 million bbl / d in July, which is slightly higher than our forecast of 90 million bbl / d. The US oil demand in Q2 is expected to average 16.2 million bbl / d closely in line with our forecast of 16.14 million bbl / d. Furthermore, the EIA reduced its US production forecast by 0.37 million bbl / d to an average production of 11.3 million bbl / d which is 0.4 million bbl / d below our previously published forecast.
On the other hand, last week’s prices were supported by the EIA report which showed that commercial crude inventories continued to shrink, with a drop of 4.5 million barrels w / w to stand at 514.1 million barrels. This was also combined by a decline in gasoline and distill inventories of 0.7 million barrels and 2.3 million barrels, respectively. U.S. oil production saw a large weekly drop of 0.3 million bbl / d, and the decline in rig count also continued, when Baker Hughes reported that the total number of oil versions fell by 4 to stand at 172, a number that could be set to fall even lower.
As for demand, US demand reached 19.37 million bbl / d, the highest number since the outbreak of the COVID-19 crisis last March. Our forecast for US oil demand is 18.79 million bbl / d in Q3 and 19.19 million bbl / d in Q4, supported by encouraging EIA data.
Conformity a key issue for upcoming OPEC + JMMC
According to Platts, OPEC-10 will achieve a total compliance of 94% in July. Iraq’s production in July stood at 3.77 million bbl / d, up by 0.07 million b / d m / m, leading to a compliance of 83%, decreased by 7% m / m. On the other hand, Angola met its promise of producing 1.17 million bbl / d in July, achieving a 103% compliance compared to the production of 1.22 million bbl / d in June with an 89% compliance. Nigeria’s compliance also improved by 5% as its production fell by 0.02 million bbl / d m / m to stand at 1.56 million bbl / d in July.
For the non-OPEC countries, compliance has been much better compared to the OPEC-10 with compliance in July stood at 99% compared to 94% compliance with the OPEC-10, leading to an overall compliance of 96 % for OPEC + in July. The decline in non-OPEC group compliance is attributed to increasing production in Russia, which increased exports by 0.09 million bbl / d m / m leading to a 96% compliance in July compared to 100% in June. Related: Why Fracking activity did not increase when oil prices returned
Nigeria is currently seeking release of its ultra-light Agbami raw to be considered as a condensate by IOCs, a problem that is not new to OPEC. In 2017, Nigeria had sought exemption from its Agbami raw when it had to stay at a production limit of 1.8 million bbl / d, reported of nearly 450 thousand bbl / d condensates, according to national figures, significantly higher than external estimates of 200 – 250 thousand bbl / d.
In 1989, OPEC defined raw materials with an API higher than 50 as condensates. However, it is often difficult to monitor condensate production and distinguish it from crude oil, because condensates can be mixed with crude oil.
Condensates are a mixture of light hydrocarbons, composed of NGLs and naphtha with an API of 45 to 120. It is naturally separated from natural gas during production as its temperature and pressure decrease to atmospheric conditions. Condensates are usually lower priced than crude oil because they contain more LPGs and light naphtha, yet some condensate prices are higher than crude oil itself because they contain up to 40% jet fuel and diesel with lower residual yields.
According to Equinor, Agbami is classified as an ultra-light low-sulfur raw with an API density of 47.9, unlike Akpo, with an API of 46, which is classified as condensate by Total. Production of the Agbami crude varies between 160 thousand bbl / d and 250 thousand bbl / d, and the majority of it is exported to China, India, Australia, Spain, the Netherlands, and Brazil.
If OPEC frees Nigeria’s Agbami raw, as is the case with Russia, about 160 thousand bbl / d of production will be removed from Nigeria’s official production number, leading to an increase in compliance to 103% from just 65% in July. Other African producers namely Congo, Equatorial Guinea, and Gabon continue to produce well above their production targets, which continues to affect the group’s overall compliance rate, an issue we expect to be on the agenda of the next JMMC.
By Yousef Alshammari for Oilprice.com
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