Global Oil Demand Is Bouncing Back

1. China gobbles up commodities

- China imported roughly 13 mb/d of oil in June, a record high.

- China also imported a record high 656,000 tons of copper last month. “This shows that China took advantage of the low copper prices in the spring (for a time copper was priced below $5,000) to buy up large quantities on the world market,” Commerzbank said in a note.

- But tensions between the U.S. and China are putting downward pressure on commodities. Copper prices fell 1.5 percent on Monday, although prices are still elevated.

- Also, the buying spree may have been temporary, as both crude oil and copper prices have increased.

- “The relatively high price level now and the high utilization of storage capacities in China make it unlikely that the buying spree will continue,” Commerzbank cautioned in a note.

2. Oil demand on the mend

- Global oil demand is “on the mend,” according to a note from Bank of America Merrill Lynch.

- But the recovery differs between developed markets and emerging markets. Most developed markets (outside of the U.S.) along with China are past their peak of Covid-19 cases. There, demand is rebounding quickly. But in many emerging markets, the virus is still spreading.

- Aviation is the one sector where demand destruction will be more long-lasting. Aviation only accounts for 7 percent of total oil demand, but the 80 percent decline in flights is a “big swing factor” in the oil market balance.

- Road traffic has rebounded swiftly, but flights have not. “China was the first country to come out of lockdown and here air travel only recovered to about 50% of the norm after which the recovery stalled, and even declined again two weeks ago as Beijing went back into lockdown,” Bank of America said.

3. A third of shale firms face insolvency

- Roughly 32 percent of oil executives said that they face insolvency in the next year if their current rate of revenue generation continues, according to a survey from the Kansas City Federal Reserve. 10 percent said they face insolvency in the next three to six months.

- The Kansas City Fed’s district encompasses drillers in Colorado, Wyoming, Oklahoma and parts of New Mexico.

- “We’re starting our 4th month without any revenue. Currently we have nothing scheduled to drill,” one executive said in response.

- Another sounded a bit more optimistic: “Continued improvement in oil prices will drive our business (i.e. whether to begin drilling or not) in the next 6 months,” the executive said.

4. Refiners’ poor month

- Refiners have done better in the past three months than they have done in the past 30 days, according to Goldman Sachs.

- But the more recent slide makes investment risk more balanced at the moment, even as long-term overcapacity remains a problem.

- Goldman singled out diversified refiners with midstream and retail exposure – the bank issued Buy ratings for Marathon Petroleum (NYSE: MPC), Phillips 66 (NYSE: PSX) and Par Pacific Holdings (NYSE: PARR).

- On the other hand, Goldman was more cautious on merchant refiners, issuing Sell ratings for PBF (NYSE: PBF), HollyFrontier (NYSE: HFC) and CVR Energy (NYSE: CVI).

- Marathon was Goldman’s top pick because of “company specific catalyst in a potential value unlock of the Speedway business,” as well as “leverage to an oil macro and economic recovery.”

5. Shale activity could begin picking up

- U.S. shale companies only completed 290 wells in June, a record low and down by 170 wells from the previous month.

- “Completion rates have been reduced to almost one quarter of March levels, but we expect June to have been the nadir of completion activity, with steady growth from this month onwards,” JBC Energy wrote in a note.

- The firm said that there will likely be an uptick in completions in July since the number of wells drilled in June outpaced the number of wells completed.

- Still, natural declines are hovering at 500,000 bpd per month, offsetting new production.

- Because the Bakken is higher cost, any drilling recovery will be concentrated in the Permian, the firm concluded.

6. Impairments highest in years

- The U.S. oil industry wrote down roughly $48 billion worth of assets in the first quarter, according to an EIA survey of 40 companies that account for 6.1 mb/d of oil production.

- The impairments don’t have an immediate cash flow effect, but companies have resorted to two main strategies to shore up their balance sheets – increase borrowing and cut spending.

- The impairments can affect the amount of credit offered by lenders, which is often based on the value of a company’s proved reserves.

- The 40 companies surveyed announced capex cuts totaling $33 billion. The group is on track to cut spending by 53 percent this year.

7. U.S. oil and product inventories hit inflection point

- The EIA reported a rather optimistic set of data this week, offering evidence that the buildup in inventories has ended and are beginning to come back down.

- Crude stocks fell by 7.5 million barrels, gasoline stocks fell by 3.2 million barrels, and distillate stocks edged down by 0.5 million barrels. Importantly, refinery runs increased while product stocks still declined. Standard Chartered called the data “highly bullish,” and the most bullish in more than four months.

- “This is exactly the kind of signal that products markets have been looking for, along with continued lower oil-on-water readings from ship-tracking data, to show that even as end-user demand recoveries are proving bumpy, there has almost certainly been a gradual improvement,” JBC Energy wrote in a note.

- Still, U.S. gasoline demand dipped, a red flag as state-level lockdown measures grow stricter amid the spread of the coronavirus. Demand is still down 0.5-1 mb/d from a year ago.