The global oil market is expected to tighten before the year-end, with demand outpacing supply growth, National Bank of Kuwait (NBK) has said in an economic report.
This, NBK said should result in a “drawdown” in global inventories that should peak in the fourth quarter of the year (Q4).
“Prices should therefore firm. This forecast comes with the important caveat that oil demand does not deteriorate due to worsening coronavirus infection rates. Moreover, Opec+ discipline will need to be maintained. Libyan, Iranian and Venezuelan production remain wildcards with bearish price potential, given how far output has fallen below potential in these countries,” NBK said.
Oil prices tested the upper limits of their near two-month trading ranges recently, with Brent and WTI futures touching five-month highs of $45.46/barrel and $42.9/b last week, respectively.
Since hitting a low of $19.3/b on April 21, the international benchmark Brent has more than doubled in price (+135%), though it remains down over 31% so far in 2020, NBK said.
Oil’s recent movements were catalysed by a combination of better-than expected US jobs data and a third consecutive week of US inventory drawdowns.
The US Department of Labour’s employment release showed weekly initial unemployment claims falling from 1.19mn to 963,000 in the week ending August 8, the first time that they have been below 1mn since mid-March.
In the same week, US commercial crude stocks declined by 4.5mn barrels to 514mn barrels (-5% from their record high of 540mn barrels in the week ending June 19).
Stocks are still around 49mn barrels (10%) above the seasonal average but they are declining. They now provide around 35 days’ worth of supply cover compared to a historic high of 42 days in early May.
Gasoline and distillate stocks also fell. But crude refining activity continues to be sluggish amid resurgent coronavirus infections; while refinery crude demand has increased recently, at 14.7mn bpd, it is still down 15% year-on-year (y-o-y), NBK said.
“Spiking and persistent global Covid-19 infections continue to worry the markets, dampening economic activity and stoking oil demand fears. Prices may remain range-bound until major demand-side announcements are made.
“These could be additional fiscal stimulus, sizeable drawdowns in crude and petroleum stocks, accelerating economic activity in large, oil consuming economies such as China, or a vaccine break-through,” NBK noted.
China’s purchases of crude in recent months have helped tighten the oil markets. Imports in June reached a record 12.9mn bpd, according to the General Administration of Customs (GAC), breaking the previous month’s record of 11.3mn bpd as China took advantage of the Saudi-Russian oil price war to load up on cheap crude.
Refinery processing rates also set a record in July, jumping 12% year-on-year (y-o-y) to 14mn bpd; NBK said citing a National Bureau of Statistics (NBS) report.