With the pandemic raging in large parts of the southern hemisphere and persisting in heavy oil consuming economies in the northern hemisphere, downside risks to the oil demand outlook are sizeable, National Bank of Kuwait (NBK) has said in an economic update.
The spike in coronavirus infections in economies newly emerging from weeks of lockdown has, however, been troubling, especially in the US. Some restrictions on mobility have had to be reimposed.
Coming in the midst of the peak summer driving season, when gasoline usage usually rises, the persistence of the pandemic is bound to add to US oil demand woes especially, NBK said.
The threat of prolonged oil demand weakness was a major caveat in the International Energy Agency’s (IEA) upwardly revised oil demand forecast for 2020. The agency, in its July oil market report, noted that its 360,000-bpd upward revision to oil demand growth (vs June estimate) in 2020 is contingent on the pandemic being brought under control.
This would bring the year average contraction in global oil demand to 7.9mn bpd rather than 8.1mn bpd as forecast earlier.
The estimate of the year-on-year decline in the second quarter is an eye-watering 16.4mn bpd.
For the time being, oil consumption is accelerating in countries emerging from lockdown. In the Far East, in Europe and in the middle east, where summer temperatures typically drive increased domestic demand for power generation (cooling etc).
The improvement in oil demand has been most noticeable in China. Figures from the country’s National Bureau of Statistics showed that crude refinery throughputs hit an all-time high of 14.14mn bpd in June, rising 9% year-on year on the back of record-high crude import volumes (13mn bpd in June, according to General Administration of Customs data, much of which is admittedly opportunistic buying as China capitalises on low oil prices.
In India, petroleum product consumption is recovering from its 13- year low in April (9.9mn tonnes), with fuel demand reaching over 92% of pre-Covid levels in June, the Ministry of Petroleum and Natural Gas reported.
This has been led by gasoline and diesel demand, as commuters prioritise private over public transportation — a recurring theme of the post-lockdown global landscape. In contrast, aviation fuel demand remains considerably weak, NBK said.
According to NBK estimates, which draw on the IEA demand and non-Opec supply projections, global stocks should begin to decline from this quarter onwards — by 4.8mn bpd in Q3, 2020 and 6.2mn bpd in Q4 on average — having ballooned in Q2 (+9.3mn bpd) on the back of rampant oversupply and dramatic demand destruction.
This should help Opec+ achieve its key target of returning global inventories back to their five-year average. The IEA estimated that global (OECD) inventories stood at 3.22bn barrels in May, 258.5mn barrels above the five year average, the most recent month for which there is data.
“The outlook, of course, is dependent on continued Opec+ compliance and oil demand growth recovering in tandem with consumer and industrial activity. A persisting pandemic and/or a second flare up of infections in the autumn/winter represent a major downside risk factor for oil prices. News that a University of Oxford Covid-19 vaccine has shown promise and moved into phase three clinical trials would be just the right medicine for the oil market as well,” NBK noted.
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