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OPEC's Revised Supply/Demand Outlook For 2020

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Includes: AOIL, BNO, DBO, DTO, DWT, NRGD, NRGO, NRGU, NRGZ, OIL, OILD, OILK, OILU, OILX, OLEM, SCO, UCO, USAI, USL, USO, USOI, UWT, WTID, WTIU, YGRN
by: Robert Boslego
Robert Boslego
Portfolio strategy, oil & gas, medium-term horizon
Summary

OPEC's revised estimate for the demand for its oil has dropped to 29.3 million barrels per day for 2020.

OPEC projects world oil demand will rise by 990,000 b/d in 2020 v. a supply rise of 2.25 million barrels per day.

OPEC is considering an additional cut of 600,000 b/d.

But much depends on the depth and length of both the Libyan oil disruption and the coronavirus impact on demand.

It's too early to have a fix on either.

OPEC released its Monthly Oil Market Report (MOMR) for February. It reported that demand for OPEC crude was 30.6 million barrels per day in 2019, 1.0 million lower than the 2018 level. It forecasts demand for OPEC crude will be 29.3 million in 2020, about 1.3 million lower than the 2019 level.

It also reported that global OECD commercial oil inventories rose by 6.8 million in December to end at 2.918 billion, 45 million higher than a year ago and 30 million higher than the latest 5-year average. The Energy Information Administration estimated that OECD stocks rose by 32 million in January, to end at 2.926 billion, 63 million higher than a year ago.

OPEC's projection for the demand for its oil in 2020 rests on a global demand increase of 910,000 b/d, which it revised down by 230,000 b/d due to the coronavirus in China and its impact on oil demand there.

With estimates of the current impact on demand as reported by the Financial Times, executives at China's largest refineries expect that the country's oil consumption could fall by 25% this month, equivalent to a staggering 3.2 million b/d. Other disruption estimates are discussed in my oil article, which places estimates between two and three million barrels per day for the most part.

The International Energy Agency reported that oil demand is set to drop this quarter for the first time since the financial crisis in 2009. It's estimating that 1Q20 demand will drop by 435,000 b/d from the same period in 2019. For the year, it dropped its demand estimate by 365,000 b/d to 825,000 b/d.

OPEC is projecting that non-OPEC liquids production (crude plus NGLs) will rise by 2.25 million barrels per day in 2020. The drivers of growth and declines are specified in the charts below.

Proposed Additional Cut

OPEC's Joint Technical Committee has proposed that the OPEC+ group cut an additional 600,000 b/d from the quotas decided in December. Russia is reportedly still considering the measure.

OPEC production fell by 509,000 b/d in January to average 28.859 million barrels per day. (Note: the total includes Ecuador, which cancelled its membership effective January 1st.) The largest decline was in Libya, which fell 344,000 b/d to 796,000 b/d due to internal conflicts. With the lower Libyan output now at 180,000 b/d, OPEC production would drop to 28.243 million if it stays there, all else equal.

That level is approximately OPEC's demand projection for 2Q20 (28.290) if Libyan production stays low until the end of the second quarter. But if Libyan oil returns to 1.1 million, OPEC production would average 29.163, nearly 900,000 b/d higher than 2Q20 demand. And thus, the additional 600,000 b/d cut they are discussing now would largely close the gap, but there would still be some excess supply.

Conclusions

I agree with the assessment by Gibson Shipbrokers that "there are plenty of unknowns, most critically how long the outbreak will last and how far it will spread. Without a doubt, the longer the duration, the bigger the implications are. For now, we are not even close to approaching the end of this epidemic."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.