OPEC may have to play its market-rebalancing act longer than initially intended as it is afraid that a second coronavirus wave would slow oil demand recovery, Reuters reported on Thursday, quoting internal OPEC research it had seen.
Should a second COVID-19 wave hit, countries may return to lockdown, derailing the oil demand recovery and stockpile drawdowns and prolonging the inventory glut, according to the research OPEC had prepared for yesterday’s meeting of an OPEC+ panel which recommended relaxing the record 9.7-million-bpd cuts as of August 1.
New lockdowns could result in oil demand dropping by 11 million bpd this year and increase inventories, which have just started to decline as demand began to pick up in June, according to the research seen by Reuters.
“It should be noted in this scenario that the overall stock build reaches an unprecedented high of 1.218 billion barrels in 2020,” OPEC said in the internal estimate.
OPEC looks at the five-year average of oil inventories in OECD countries as one of the metrics to gauge the success of its supply-fixing policies. If a second wave forces new lockdowns, this metric is at risk.
Analysts have already started to warn that a second wave of surging coronavirus cases could send oil prices into “tailspin”, which would further hit OPEC+ producers as it would cripple – again – their oil revenues. Related: New Tech Puts Lithium Batteries Back In The Energy Storage Race
Despite the fear of a second wave, OPEC+ will be easing the record 9.7-million-bpd production cuts as of August as demand has started to recover, Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, said on Wednesday at the meeting of the Joint Ministerial Monitoring Committee (JMMC).
“The Committee observed that there were encouraging signs of improvement as economies around the world open up. While there could be localized or partial lockdowns re-imposed in some places, the recovery signs are clear, both in physical and futures markets,” OPEC said, noting the highest-ever compliance of the OPEC+ group since it started managing supply to the market in 2017.
The JMMC “noted that, moving to the next phase of the agreement, the extra supply resulting from the scheduled easing of the production adjustment will be consumed as demand recovers.”
By Tsvetana Paraskova for Oilprice.com
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New data emerging now show that global lockdown immediately after the spread of the pandemic has reduced global demand by no more than 8 million barrels a day (mbd) and not 30 mbd as predicted at first. My own research shows that the decline in global oil production could be no more than 3 mbd from 101.34 mbd in 2019 to 98.34 mbd in 2020. So the talk about new lockdowns resulting in oil demand dropping by 11 mbd is fanciful.
The litmus test for the progress of global oil demand is how much the glut has declined since the implementation of OPEC+ cuts. If the glut has declined steeply, then OPEC+ will have the leeway to consider reducing its production cuts from the current 9.7 mbd to 7.7 mbd from August onwards. Any hasty reduction could cost them the price gains achieved in the last three months.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London