Oil price upside looks limited amid rising supply

OIL prices have been stuck in a narrow range for the last several weeks and further upside looks limited amid rising supply as Opec+ pares back its production cuts and demand sees an unexpected slowdown led by a resurgence in Covid-19 cases.

"Oil markets continue to find themselves in 'No-Man's Land', neither low enough to trigger production cuts nor strong enough to pull barrels from storage," Chris Midgley, global director of analytics at S&P Global Platts Analytics, said.

Secondary lockdowns in the United States and weaker demand in China and India saw global demand falter in July, growing just 1.2 million barrels per day (b/d) after strong month-on-month growth of nearly 6 million b/d in May and 5.6 million b/d in June, according to Platts Analytics.

The physical oil market faces several headwinds. Supply is on the rise, demand growth faces a slowdown, stocks are high, Chinese buying is set to slow, and global oil refining is heading into maintenance season, Mr Midgley said.

Platts Analytics sees Dated Brent prices at around US$40/barrel for the remainder of the third quarter.

After dropping by 13 million b/d from April to June, global oil supply is now starting to recover with the return of shut-in barrels, the unwinding of Saudi Arabia's over-compliance in July, and the Opec+ agreement to taper production cuts.

Global oil supply is on track to increase by 4.5 million b/d through July and August, and another 3 million b/d by end-2020, according to Platts Analytics.

The 23-country Opec+ coalition enacted a 9.7 million b/d production cut accord in May in response to the Covid-19 crisis, but rolled the deal back to 7.7 million b/d in August through to the end of the year. The coalition is betting on a pick-up in global fuel consumption and better preparedness by governments to prevent another spike in novel coronavirus cases.

But Asian consumers, who normally welcome rising Middle East crude oil supply, have barely taken notice as they grapple with crippling demand and high stocks, and it remains to be seen where all this excess oil will eventually end up.

The lack of any significant recovery in demand for jet fuel, the product worst hit by the pandemic, has made it difficult for refiners to boost run rates.

North-east Asian refiners in particular are determined not to abruptly boost crude imports and refinery run rates in coming months as fuel demand recovery remains fragile. South Korean refiners, who are typically active exporters of refined products, are focusing on maintaining a supply-demand balance and remain cautious about not over-committing to crude procurements.

Similarly, Japanese refiners are keeping a close eye on crude procurements in the coming months, amid rising concerns over the growing number of new Covid-19 cases.

China and India have always been the most dependable and by far the biggest outlet for Opec+ producers but Asia's biggest oil consumers may also disappoint suppliers in the second half of 2020.

India, one of the fastest growing oil markets in Asia in recent years, is expected to end 2020 with its oil demand slipping into the red, a trend not seen for nearly two decades. According to Platts Analytics, India's oil demand is expected to be down 115,000 b/d year-on-year in the second half, and full-year demand will be down by 405,000 b/d year-on- year.

"India's refinery runs in the second half of the year are expected to be 260,000 b/d lower, year-on-year, as refiners hold back from raising throughput," said Lim Jit Yang, adviser for oil markets at Platts Analytics.

Total capacity utilisation across all refineries in India had risen to 85 per cent in June, from 77 per cent in May, as retail fuel demand showed signs of life with the easing of lockdowns. But the trend is reversing.

Meanwhile, backed up by ample onshore storage space, China has been aggressively buying crude oil to take advantage of low prices.

China's crude oil imports surged 34.4 per cent year-on-year to hit a record high of 12.99 million b/d in June, official customs data showed. Its crude imports in July were at 12.13 million b/d, hovering over the 12 million b/d mark for the second time in history. Vessel tracking data showed that port congestion and vessel queues continue in August, which will sustain the country's crude imports to stay at a high level in the month.

But from September onwards China's crude shopping spree is about to come to a halt due to high crude stocks and weak domestic refining margins. China's crude stockpiles reached a record high level in July as refiners struggled to digest the influx of crude oil cargoes purchased during the second quarter, while domestic fuel consumption slowed amid widespread flooding across 23 provinces during the month.

As a result, high inventory will eventually dampen China's crude oil deliveries as destocking will take time.