Rystad Foresees New Oil Supply Glut
A new four-month oil supply glut of approximately 170 million barrels should result from the partial return in August of curtailed OPEC+ production, Rystad Energy predicts in a new analysis.
The consultancy bases its prediction on the assumption that “a mild second wave” of COVID-19 in key markets will prevent oil demand from rebounding as quickly as previously thought.
“OPEC’s experiment to increase production from August could backfire as we are still nowhere near out of the woods yet in terms of oil demand,” Bjoornar Tonhaugen, Rystad’s head of oil market research, commented in a written statement emailed to Rigzone. “The overall liquids market will flip back into a mini-supply glut and a swing into deficit will not happen again until December 2020.”
During the first five months of 2020, global oil production exceeded market demand, Rystad stated. In June 2.2 million barrels per day (bpd) of implied inventory draws provided some relief to oil stocks, the firm continued. July is the final month of OPEC+ members’ “record 9.7 million bpd output curtailment commitment” that should create a 1.9 million-bpd demand overage against supply for the month, it added.
Citing the second coronavirus wave, Rystad pointed out that it has lowered its short-term expectations for demand recovery in total liquids (crude, condensate, natural gas liquids, other liquids and refinery gains). Between August and October, it projects flat total liquids demand levels at approximately 90.5 million bpd. During the final two months of 2020, the firm anticipates stronger liquids demand: 92.9 million bpd in November and 94.6 million bpd in December.
Rystad stated that it envisions a “mini growth rally” for global oil supply after falling to 86.4 million bpd in June and likely reaching 88.2 million bpd this month. Given the planned OPEC+ output increase and the reactivation of other shut-in production, the firm is forecasting:
- 91.2 million bpd in August
- 92.5 million bpd in September
- 92.9 million bpd in October
- 93.3 million bpd in November
- 93.4 million bpd in December.
To be sure, Rystad observed its total 170-million-barrel surplus projection for August to November is much lower than the 1.4-billion-barrel glut in crude stocks the oil market witnessed the first five months of this year.
“This historic inventory build-up will still act as a soft brake on price increases when demand rebounds,” Rystad stated.
The firm also offered the following oil market supply-side insights:
- U.S. oil (crude and condensate) production likely bottomed out at 10.4 million bpd in May.
- Although U.S. oil production should rise until September, low hydraulic fracturing activity and natural decline prompted Rystad to revise downward its growth expectations. Now the firm predicts that U.S. production will approach the 11- to 11.2-million-bpd range and then retreat toward 10.7 million bpd during the fourth quarter of 2020 and first quarter of 2021.
- Citing Iraq’s promise to make up for previous missed compliance with OPEC+ output limits, Rystad revised its Iraq oil production estimate by 200,000 bpd. The firm expects Iraq’s output to decline to 3.8 million bpd in July and remain capped below 4 million bpd through October, subsequently rising gradually.
“We doubt that the market can take the additional production volumes from OPEC+ from August without negative consequences for oil prices, as the new glut will likely cancel some of the gains that led Brent to post-COVID-19 highs of about $44 this month,” remarked Tonhaugen.
Furthermore, Rystad expressed its view that OPEC+ may need to put its plans to taper output to the end of the year on hold if it aims to sustain the oil price recovery.
“This can of course still happen, perhaps already in a month, as OPEC’s market monitoring committee will be reassessing the market on a monthly basis,” concluded the firm.
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