The Phil Flynn Energy Report
Not All Bad
While the new International Energy Agency (IEA) report is grabbing headlines by saying that the global demand for oil might not recover until 2022, the news in the report isn’t all bad. The report suggests that demand destruction, while historically bad, wasn’t as bad as expected. They also reported that while global inventories in OECD countries are at record highs, the historical production by OPEC and Russia, not to mention plunging output in the U.S., may have the market get into balance sooner than expected. In other words, the report wasn't as bad as some had feared. Now add to that the fact that the Federal Reserve is adding more stimulus by buying corporate bonds and the Fed Chairman Jerome Powell is going to ask for fiscal stimulus. He may get it. Reports that President Trump is proposing a $1 trillion energy-consuming infrastructure bill is also adding support. We said yesterday we thought the selling surrounding coronavirus fears were overdone and today those fears, at least for now, seem to be in the rear-view mirror.
Let's go over what precisely the IEA said. The IEA oil demand in 2020 is expected to fall by 8.1 million barrels per day (BPD) the largest in history, before recovering by 5.7 million BPD in 2021. Reduced jet and kerosene deliveries will impact total oil demand until at least 2022. In this report, the forecast for 2020 oil demand has been raised by nearly 500,000 BPD to 91.7 million BPD, due to stronger than expected deliveries during the Covid-19 lockdown. In China, oil demand recovered fast in March-April, and India's demand rose sharply in May.
The IEA says that while the oil market remains fragile, the recent modest recovery in prices suggests that the first half of 2020 is ending on a more optimistic note. New data show that demand destruction in the early part of the year was slightly less than expected, although still unprecedented. On the supply side, record output cuts from OPEC+ and steep declines from other non-OPEC producers saw global oil production fall by a massive 12 million BPD in May. In addition to a 9.4 million BPD decline in OPEC+ supply last month, output from non-OPEC countries has fallen by 4.5 million BPD since the start of the year. To further speed up the market rebalancing, OPEC+ decided on June 6 to extend their historic output cut of close to 10 million BPD through July.
In sporting terms, the 2020 oil market is now close to the half time mark. So far, initiatives in the form of the OPEC+ agreement and the meeting of G20 energy ministers have made a significant contribution to restoring stability to the market. If recent trends in production are maintained, and demand does recover, the market will be on a more stable footing by the end of the second half. However, we shouldn’t underestimate the enormous uncertainties. Oil trade today will look to the Fed but also the API report. Reports are showing that we will see a big draw in Cushing, Oklahoma once again, but more offloading of Saudi oil tankers should give us a build. Gas supply could fall big, and distillates should rise yet again. Yet there’s no doubt that demand should increase.
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