Investogist - Oil Market Review

The renewed optimism on the global oil market outlook and expectations for a further recovery in oil demand, pushed oil prices higher in May 2020.

This is due to the optimism that fundamentals would improve faster than expected after several European and Asian countries, along with a number of US states, began easing restrictions imposed due to Covid-19 pandemic.

The historic deal agreed by OPEC and its allies coupled with additional voluntary cuts, which provided strong support for the reduction in the supply of oil also bolstered the price recovery.

According to the recent OPEC Monthly Oil Market Report, global liquids production in May decreased by 10.04 mb/d to average 89.89 mb/d, compared with the previous month.

Non-OPEC liquids production in May, including OPEC NGLs and non-conventional liquids, is estimated to have fallen by 3.74 mb/d m-o-m to average 65.69 mb/d, lower by 3.99 mb/d y-o-y.

Figure 1: OPEC and World Oil Supply

Oil price movement

Spot prices rose on gradual crude demand recovery as some refiners increased their through puts and returned to the market to purchase crude, amid low loading programmes for May and June, which created lower apparent crude offers.

All physical crude oil benchmarks increased m-o-m in May, with North Sea Dated and Dubai first month rising by $9.98 and $9.02/b, respectively, or 53.0% and 42.3%, to settle at $28.81/b and $30.35/b, while the WTI first month climbed $12.05, or 72.9%, to settle at $28.57/b.

The spread between physical benchmark North Sea Dated and the futures benchmark ICE Brent narrowed significantly in May to $3.60/b, compared to $7.80/b in April, mirroring the easing crude oil surplus in the physical market amid a reduction of the large volumes of unsold cargoes in the Atlantic Basin recorded the previous month.

Future oil prices bounced back in May, after four consecutive months of sharp declines, from the low levels recorded in April. This was due to renewed hope on the outlook for global oil market fundamentals that were severely impacted by an unprecedented slump in demand resulting from the halt in economic activities as the world battles COVID-19 pandemic.

In May, ICE Brent rose by $5.78, or 21.7%, to average $32.41/b, and NYMEX WTI soared by $11.83, or 70.8%, to average $28.53/b. Year-to-date (y-t-d), ICE Brent was $24.37 lower, a drop of 36.5%, at $42.38/b.

While NYMEX WTI was down by $21.47, or 37.0%, at $36.50/b, compared with the same period a year earlier. DME Oman crude oil futures prices rose m-o-m by $9.77 in May, or 40.8%, to settle at $33.69/b. Y-t-d, DME Oman was lower by $24.56, or 36.9%, at $41.96/b.

Figure 2: Crude oil price movement

Oil futures prices witnessed a recovery since early May due to signs of a recovery in activity in countries such as China, with the country’s services sector growing in May for the first time since January.

OPEC Reference Basket (ORB) The ORB value rebounded in May, the first monthly increase since December 2019, reflecting gains in major benchmarks, as global oil supply declined and demand for crude oil started to gradually improve amid the easing of COVID-19 related constraints.

On a monthly basis, the ORB increased $7.51 to $25.17/b, up by 42.5%. However, compared to the previous year, the y-t-d ORB was down 39.9%, from a $65.96/b value in 2019 to an average $39.65/b this year

Several refiners started to increase their crude runs, probably encouraged by signs of oil demand recovery and easing of COVID-19 related restrictions that would boost oil demand. These were elevated higher, mainly due to very low global crude oil prices, rather than demand for oil products.

The National Bureau of Statistics of China said in mid-May that China’s output of crude oil processing volumes rose to 13.16 mb/d in April, from 11.83 mb/d in March, or an increase of about 11%.

US refinery runs also showed signs of recovery with crude oil inputs into refineries increasing from 12.38 mb/d in the week of 10 May to 13.5 mb/d in the week ending 5 June, a rise of 1.1 mb/d, or 9%, according to EIA data.

Current oil Prices

U.S oil futures, Western Texas Intermediate (WTI) is trading at $40.29 barrel while Crude benchmark futures Brent is trading at $42.68 per barrels. Whereas Western Canadian Select (WCS) is trading at $29.97 per barrels

OPEC Basket closed at $37.7 per barrel while Nigeria banner oil Bonny light stood at $40.68 per barrel.

OPEC Crude Oil Production

According to secondary sources, total OPEC-13 preliminary crude oil production averaged 24.19 mb/d in May, lower by 6.30 mb/d m-o-m, as ten OPEC MCs have agreed to adjust down their production from May 2020. Crude oil output in May decreased almost in all MCs mainly in Saudi Arabia, the UAE and Kuwait.

Nigeria Crude oil production dropped by about 185,000 barrels per day to 1.592mbpd in May compared to 1.777 mbpd in April. The oil rigs in Nigeria dropped to 11 in May from 16 recorded in April. At the end of Q1 2020, Nigeria rig count was 19.

Despite the slight recovery in the PMI of Stanbic IBTC Bank and IHS Markit last month, it remained below 50, implying that the economy of Africa’s largest crude producer may continue to weaken in 2Q20 according to the OPEC Monthly Oil Market Report.

The Central Bank of Nigeria composite PMI for the non-manufacturing sector dropped to 25.3 in May of 2020 from 49.2 in April.

Nigeria’s current account is anticipated to remain in deficit due to the declined exports as well as the limited capital financing amid the global financial turmoil caused by to the COVID-19 pandemic.

The tight monetary conditions combined with the surge in the annual rate of inflation, which spiked to 12.34% in April 2020, the highest since April 2018, from 12.26% in March, may offset the effect of the oil price rebound in the short term and push Nigeria’s economy into a deep recession in 2020.

Gasoline imports into Nigeria in May were up by 10 tb/d m-o-m at 0.28 mb/d. This implies that onshore stock draws had made space for additional discharge.

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Additionally, gasoline floating in Nigerian anchorage zones peaked on 4 May at 13.80 mb, a multi-year high. The gasoline crack spread averaged $8.99/b in May, slightly up by 21ȼ m-o-m, but down by $10.31 y-o-y.

World Oil Demand

World oil demand is projected to decrease by 9.1 mb/d in 2020, unchanged from the previous month’s assessment. Total global oil consumption for the year is expected to average 90.6 mb/d.

In the OECD (Organization for Economic Co-operation and development) region, oil demand is anticipated to plummet by 5.2 mb/d compared with total 2019 oil requirements, following declining indicators in the transportation sector in OECD Americas and Europe at the beginning of 2nd second quarter 2020.

In the non-OECD region, oil demand is foreseen to steeply decline by 3.9 mb/d for the first time on record. Oil requirements in all sub-regions, including China, Other Asia, Latin America and the Middle East, are expected to drop y-o-y in response to strict measures taken by various governments to contain the further spread of COVID-19.

Written by;

Ifunanya Ikueze