Oil prices rose on Tuesday afternoon, ahead of the weekly crude inventory data releases, but traders remain concerned about the pace of the recovery in global oil markets.
After a sobering OPEC report on Monday, the IEA published its updated demand forecast for 2020, revising its previous outlook downward by 200,000 bpd to 91.7 bpd, slightly more optimistic than OPEC's 90.2 million bpd forecast.
After a few months of quick demand recovery, the International Energy Agency now sees headwinds for further recovery of crude demand, expecting the pace of recovery to slow down significantly as most of the ''easy gains'' are already achieved.
While most analysts and energy executives remain concerned about the slowing demand for road fuels as driving season in North America comes to an end, it's jet fuels that represent the largest mid to long-term threat for oil markets.
Industry executives even went as far as saying that refiners should recalibrate their product output away from jet fuel, if possible at all.
The IEA also cut its forecast for crude inventory draws for the last few months of 2020, saying that commercial crude stocks hit an all-time high of 3.225 billion barrels in July.
Large oil traders such as Vitol and Trafigura are said to have started to charter tankers for floating storage as markets are once again looking at a steeper contango, a situation where the future price of a commodity is higher than the expected spot price or front-month contract, pointing at a 'supply-heavy' market in the near-term.
The positive news for crude markets this week could come from OPEC and partners, which are set to meet on Thursday. The cartel is unlikely to make deeper output cuts, but strong compliance and compensation for the missed target could offer some support to the markets.
Additionally, Hurricane Sally, a category two hurricane, threatens both Gulf of Mexico operations and Gulf coast refiners as slowly barrels towards the Louisiana coastline. Around 25 percent of crude production has been shut-in, but offshore drillers are already preparing for a quick resumption of production.
The Gulf of Mexico shut-ins led to a small bump in oil prices on Tuesday morning. At 11:45 AM ET, WTI crude traded 2.25% higher at $38.10, with Brent crude rising above $40.
By Tom Kool of Oilprice.com
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Tom majored in International Business at Amsterdam’s Higher School of Economics, he is Oilprice.com's Head of Operations More
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