Deep production cuts could lead to a lasting deficit in oil markets

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Forced halts to oil production and the extension of OPEC’s generous voluntary cuts in July will not only balance global demand for crude oil and condensate hit by Covid-19, but are deep enough to create a monthly deficit from June 2020 and will continue uninterrupted until the end of next year, according to an analysis by Rystad Energy.

Oversupply, which caused WTI oil prices to fall earlier this year, is a thing of the past as long as OPEC compliance remains strong and the trajectory of oil demand recovery is not radically changed. The last surplus month appears to have been May, when crude and condensate production exceeded demand by about 6.1 million barrels per day (bpd).

June is now already set for a global production deficit of about 1.5 million bpd. The imbalance is expected to reach 4.6 million bpd in July, 4.2 million bpd in August and, after being slightly reduced for the remainder of 2020, peak at 5.2 million bpd in January 2021. Although the deficit will then ease, Rystad Energy estimates that monthly deficits will remain throughout next year.

“We believe that OPEC is trying to create a bullish mini-cycle by rapidly tightening the fast market, helping to drive down prices and creating a supply environment that will facilitate rapid relief from oil storages, as deficits will trigger large inventory draws,” said Bjar Tonhaugen, head of oil markets at Rystad Energy.

Rystad Energy estimates that global crude and condensate production will remain below 80 million bpd for all remaining months of 2020. Production is expected to reach 71.4 million bpd in June and increase monthly to a peak of 78.4 million bpd in December.

Demand, on the other hand, is expected to reach 72.9 million bpd already in June 2020 and exceed 80 million bpd from September, reaching an annual monthly peak of 82.3 million bpd in December.

“However, if the price of oil continues to rise steadily, it will stimulate the reactivation of parts of reduced U.S. oil production. In addition, if frac crews end their vacation earlier, U.S. volumes could return faster than OPEC expected, which will make up some of the shortfall,” Tonhaugen added.

By Rystad Energy

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