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A Scenario for Global Crude Balances

May 1, 2020

As of today, May 1, the agreed upon OPEC cuts are officially coming into effect.  So far this week we have seen the oil markets go from abysmal bottoms to relative support given not only the production cuts but also somewhat positive news regarding progress with COVID-19 drugs and potential re-openings of some parts of the US and world economies this month.  With that in mind, we take a look on how crude oil balances may evolve in the foreseeable future.

By using the latest available Data in April, we attempted to map out the changes in global crude inventories for the following months.  There are two important elements in this projection.  First, we assume that the OPEC cuts are strictly adhered to and are eventually joined by additional market cuts.  This week alone we’ve seen Norway announcing production cuts as well as some activity in Texas and Oklahoma regarding the same.  The second element is the return of crude demand at the refinery level.  We have already seen the Far East and especially China bouncing back and we, optimistically, expect the West to follow in Q3 2020, although there is still risk of underutilization given brimming storage on land and on water.  What looks less ambiguous at the moment is that for the first half of 2020, a long crude balance will be evident and not immediately affected by the OPEC cuts.

Despite that, we still project that the excess in crude supply will be reduced from more than 18 million b/d in April to closer to 10 million b/d in May, something that will likely reduce the need for additional floating storage.  The crude price increase in the past few days with the subsequent reducing of forward spreads (e.g. Brent 1/3 came down from US -$6.91/bbl on April 22 to US -$4.18/bbl on April 30) make this argument even more valid as commercial floating storage may stop making economic sense very soon.  With the hopeful advance of the world to a post-pandemic recovery, we expect to see the cuts starting to work amid an increased demand environment.

Should everything proceed as expected, we project that starting July we may see a net reduction of inventories at a steady average rate of about 4 million b/d throughout the year and into 2021 (Figure 1).  The drawdown from July 2020 to March 2021 will likely have an effect on land and floating inventories, eventually leading to a crude deficit.  At that point we would not be surprised if OPEC+ reconsiders their previously announced cuts and move to increase production.  Until then though, we understand that there are still a lot of unknowns that may well skew projections to an unexpected direction, as our experience of 2020 has been so far.

Figure 1 Crude Stock Changes (January 2020 – April 2021 F) 

Source: McQuilling Services