Global oil demand will recover significantly next month, climbing to be within 10% of the level that the world saw prior to the coronavirus pandemic, Russia Energy Minister Alexander Novak said on Thursday, according to Reuters.
That demand, according to Novak, was off by 25% in April, compared to demand levels before the virus hit, causing major lockdowns the world over-including the world's top two oil consumers, China and the United States.
OPEC seems to agree.
Yesterday, OPEC agreed to relax on August 1 its production cuts that it had set for the last couple of months, with the anticipation that demand would improve accordingly. OPEC will reinstate 2 million barrels per day of oil production from its 9.7 million bpd that it had cut in May, June, and July.
OPEC cautioned, however, that another possible wave of the coronavirus-particularly in the United States-would continue to sap demand.
Russia, as part of the OPEC+ group, issued a caveat for the increase in oil production, stating that the additional oil produced by OPEC+ member countries in August would be consumed domestically by each country, and not exported. Novak insists that Russia will be able to consume any additional production for August.
Russian Urals is now trading at a $.50 premium to dated Brent, however, and so Russia could be tempted to export that grade in order to capitalize on the favorable differential.
For the world's most visible data-dominated oil market, the United States, this is critical, with Saudi Arabia's exports dropping off in June, which allowed US inventories to draw down this week, according to data provided by the EIA and API.
The increased OPEC+ production starting in August is expected to run through December.
By Julianne Geiger for Oilprice.com
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Comments
Whilst global oil demand led by China has improved significantly, the fact that oil prices have been hovering around $41-$43 a barrel means that the glut in the market while declining is still huge.
Therefore, I find the statement by Russia’s energy minister Alexander Novak that the additional 2 mbd produced by OPEC+ member countries in August would be consumed domestically by each country and not exported very puzzling. When OPEC+ introduced its major cuts in April, the idea was to reduce its exports and not cut the domestic consumption of its members. The idea of returning 2 mbd of production to the markets is intended to avoid a tighter supply in the market and not to boost domestic consumption.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London