Global crude oil market to remain in a deficit over the rest of the year, with average of 3.56mbpd (Q3 and Q4 deficit of 3.7mbpd and 3.14mbpd respectively).
Irrespective, prices will remain range bound due to slower inventory draws at a rate of 3.7mbpd and 3.1mbpd in Q3 and Q4 respectively compared to inventory buildup at a rate of 7.2mbpd in Q2.
Brent crude oil price will average $44.13/barrel over the rest of the year with 2020 average of $41.99/barrel.
Production Scale Back Pressured Prices
The deficit in the global crude oil market narrowed in the month of August to 2.76mbpd following a faster increase in supply relative to demand. Global oil production over August increased by 1.84mbpd to 91.55mbpd with OPEC and Russia accounting for a large proportion of the increase. Excluding OPEC, global supply would have grown modestly by 0.830mbpd. Elsewhere, global oil consumption improved by 1.03mbpd in August to 94.31mbpd (compared to growth of 3.04mbpd in July) following increases in Canada (+8.2% MoM), Japan (+3.7%) and Eurasia (+3.4%). The consumption level in August, is an improvement of 13.44mbpd compared to the April low of 80.87mbpd. Accordingly, Brent crude spot prices averaged $45.10/barrel in August, up $1.8/barrel from the average in July. Also, the front-month futures price for Brent crude oil settled at $45.28/barrel on August 31, an increase of $1.98/barrel from July 31, 2020 while the front-month futures price for West Texas Intermediate (WTI) increased by $2.34/b during the same period, settling at $42.61/barrel.
Slower Rate of Inventory Draw Will Keep Prices Range Bound
Notwithstanding the expectation of the market remaining in a deficit over the rest of the year, with average of 3.56mbpd (Q3 and Q4 deficit of 3.7mbpd and 3.14mbpd respectively), crude oil prices are expected to be range bound due to the still elevated inventory levels occasioned by the cumulative market surplus of 39.2mbpd over H1 2020. Despite the gradual drawdown, U.S. commercial inventory are still 15% above the five-year average. EIA expects inventory draws at a rate of 3.7mbpd and 3.1mbpd in Q3 and Q4 respectively compared to inventory build-up at a rate of 7.2mbpd in Q2. As a result, EIA forecasts Brent crude oil will average $44.13/barrel over the rest of the year with 2020 average of $41.99/barrel (compared to year average estimate of $41.59/barrel in August) which is lower than average of $64.4/barrel in 2019. For us, we believe the gradual opening of key economies and minimal infection rate could result in a rebound in oil demand, which coupled with full compliance by OPEC+ will provide further upside potential for prices. However, a renewed lockdown due to second wave of the Cvid-19 could see prices slide further to the bottom.
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