Oil Market Recovery Could Be Erratic

Oil Market Recovery Could Be Erratic
IHS Markit Energy Advisory Service sees pattern of "stop-and-go rallies and selling cycles."

The oil market has experienced unprecedented demand destruction, supply cuts and inventory builds in just a matter of weeks. Recovering from recent events will take considerably longer, IHS Markit Energy Advisory Service predicts in a new report.

“It may be hard to comprehend now,” Roger Diwan, IHS Markit’s vice president for financial services, commented in a new oil market assessment emailed to Rigzone. “But barring a second wave of the pandemic, nearly all pre-COVID demand could return by the second half of 2021.”

Under that scenario, Diwan envisions a “market squeeze” – supply destruction curbs the ability of supply to meet recovering demand – occurring in the medium-term. He also expects an erratic recovery period.

“But make no mistake, the road to oil price recovery will likely be choppy and plagued with stop-and-go rallies and selling cycles until some level of certainty is restored,” stated Diwan.

From now until the second half of next year, IHS Markit predicts the oil market will recover in the following three phases:

  • Second Quarter 2020: During the current “crash correction,” 13 to 15 million barrels per day (bpd) of crude production will likely be removed from global supply as demand shows signs of recovery. The “massive inventory overhang” likely will not show material declines until late June or early July.
  • Third Quarter 2020 to First Half 2021: Oil prices during this “just-in-time oil market” period will depend on an “unstable balance of an uncertain demand recovery and the record amount of supply on the sidelines,” IHS Markit stated. The firm noted the “shape” of the pandemic – influenced by testing, tracking and any vaccination – and its effect on behavior and economic activity will have the greatest impact on oil industry predictability.
  • Second Half 2021: IHS Markit expects that oil market demand will return to 96 to 98 percent of pre-COVID-19 levels in this third phase, with much sidelined productive capacity going back online. Unless a second wave of the pandemic emerges, the firm contends this recovery could start to take shape a year from now. Moreover, it noted this phase could initiate the aforementioned market squeeze.

Should the above three-step oil recovery path materialize, the necessary conditions would exist for increases in oil production from the Persian Gulf and Russia, IHS Markit stated. Furthermore, the firm anticipates a return to growth for U.S. shale – but from a much lower base – amid the scenario it has outlined.

Diwan also underscored the exceptional circumstances at play in the oil market.

“Facing a demand crisis of uncertain parameters, the skew of risks is likely on the downside in the short-term should demand’s recovery underwhelm, and to the upside towards the latter part of our outlook as the physical reality of the supply destruction becomes clearer,” he concluded. “It is important to remember that this is an unprecedented crisis. While fundamentals do point to structural improvements ahead, some of the oil market’s foundational tenets could crumble by the time the dust settles on the COVID-19 pandemic.”

To contact the author, email mveazey@rigzone.com.


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