Oil demand could rebound enough to exceed supply by the end of this month, Goldman’s head of commodities Jeffrey Currie told Barron’s Market Brief, noting that this would be in no small part because of the production cuts implemented by all major producers.
However, there are some 1.2 billion barrels in storage, Currie added, that would need to be drawn down before prices improve for more than a couple of hours. This, according to Currie, will happen in three stages.
The first oil in storage to go would be the millions of barrels in floating storage. It is the most expensive kind of storage, so it would make sense that traders and producers would first aim to get rid of it to save on tanker fees. Currie says this will happen sometime in the third quarter of the year. The amount of oil removed from floating storage will be around 450 million barrels. In the fourth quarter of the year, oil stockpiles in onshore storage will begin to decline, Currie said, by up to 400 million barrels.
However, a strong rebound in prices is unlikely to take place anytime soon--and such a rebound would be undesirable. If Brent rises above $30 a barrel, Goldman’s commodity analysis head argues, it would spur a rebound in production, implying a rebound in supply, and a rebound in supply will immediately pressure prices yet again.
Demand remains the key factor for oil prices, and demand will likely remain depressed throughout the year. In mid-April, Currie noted, it fell by about 30 million from pre-crisis levels. Now, demand is about 19 million bpd below pre-crisis levels. While this demand has started to improve, it would still be down by 17 million bpd from pre-crisis demand this month and by 12 million barrels in June and July. By August, things will be looking up, with demand at 5-6 million bpd below pre-crisis levels.
By Irina Slav for Oilprice.com
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China as the driver of both the global economy and oil demand growth will lead oil out of its catastrophic ordeal. China’s crude oil imports for the first four months of 2020 averaged 10.11 million barrels a day (mbd) and were slightly higher than the same period of 2019 despite the coronavirus outbreak. This strongly suggests that a recovery is underway.
While it may take to the end of 2021 before the global oil demand returns to 2019 level, demand will start to accelerate and the glut will also start to reduce quickly with oil prices hitting $40-$50 a barrel in the second half of this year and touching $60 early 2021.
Moreover, it matters not whether the reduction in glut comes from floating storage or
land storage as long as it gets down.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London