Price action signals a rapidly balancing market (2021 oil is cheap)

It is a huge challenge to be an oil analyst these days because the changes are so fast, the magnitudes are so large and exact numbers are so hard to pinpoint. Early estimates/projections for declines in global oil demand in April has been in the range of minus 30 m bl/d to minus 17 m bl/d. The proof is in the pudding though: Inventories. Morgan Stanley’s latest estimate is that global oil inventories rose by 13.4 m bl/d in April. If that is the total inventory build for both crude and products, then early projections for a massive fall in global demand of up to 30 m bl/d is totally off the mark and the market could today be close to balanced.

Gunvor stated in mid-April that in their bottom-up analysis they could not find more than 70 m bl/d of demand versus a normal of 100 m bl/d. The US EIA in its April STEO report projected global demand down by 17 m bl/d vs its February report. The IEA estimated in its April report that global demand would be down by 23 m bl/d in Q2-20 vs Q2-19.

Actual data for supply and demand on a global scale are hard to aggregate and usually arrive several months after the fact. The estimates we have had so far are thus exactly that, estimates. Especially IEA’s April OMR forecast of a pull-back of 23 m bl/d YoY in Q2-20 as it is forward looking.

There is no doubt that the world to a large degree moved to an almost stand-still for a while and that oil demand has been hurt badly. How badly is the key question and how quickly it will recover.

The uncertainty over demand is huge, the range is wide and the magnitude of the demand shortfall for any of the estimates are all off the historical scale.

OPEC+ probably increased production by close to 2 m bl/d from March to April. Non-OPEC+ production may on the other hand have declined by up to 2 m bl/d. Production did over all at least not decline in April.

If we take the IEA’s projection of a pullback in demand of 23 m bl/d as the base assumption, then global inventories should have increased comparably in April. According to MS (via Bloomberg) the global build was more like 13 m bl/d in April based on satellite surveillance, onshore tank tracking, oil in transit and floating storage. If this reference is for both crude and oil products it means that even the very wide range of estimates we have been looking at so far are significantly off the mark.

If the IEA is correct in its assessment that global demand would stay 23 m bl/d below last year for all of Q2-20 then the historically large cut by OPEC+ of close to 11 m bl/d reduction from April to May and close to 9 m bl/d vs Jan/Feb would still leave the global oil market with a very large running surplus of oil of up to 12 m bl/d. If we factor in a 2-3 m bl/d decline in non-OPEC+ as well the surplus would still be close to 9 m bl/d in May which is enormous.

Such a surplus would imply further strong stock building, deepening contango in the crude curves and very bearish and declining spot crude oil prices. This is however not at all what we are seeing in the crude oil market these days. Spot prices are instead rising, and crude curves are flattening.

Price action these days would match much better with the reported stock building of 13.4 m bl/d in April estimated by MS (via Bloomberg). Assume that the demand short-fall in April was more like 13 m bl/d. Add in an oil demand recovery in May (due to economic opening) as well as a production cut of 9-11 m bl/d from OPEC+ (depending on base-line) and a non-OPEC+ production decline of 2-3 m bl/d then the global oil market in May would be close to balanced and could even be short.

Right now, the price action has been mostly focused on a flattening of crude oil curves. Bearish time-spreads are probably taken off rather than a full-fledged bullish buying spree. The reason for saying this is because the front-year Brent 2021 is trading at only $37.3/bl which is only $1.6/bl above its lowest closing price. The same goes for almost all the front-year 2021 oil product prices. They are all barely off their lows. They are at a bargain but maybe not for long.