Oil Market Showing Signs of Life

Larger than expected OPEC cuts (derived from deeper-than-quota GCC curtailments and robust compliance from traditional laggards) has reduced the need for additional non-OPEC shut-ins. The greater burden taken by less price - sensitive producers (on a cost-per-barrel basis) has removed some of the need to hold prices at levels that motivate US producers to shut-in production , subsequently easing a key source of downwards pressure from the market. Demand indicators are also supportive, with oil consumption increasing on a m/m basis as countries exit lockdown and discretionary transportation returns. In the near - term, w e remain cautious on oil prices at these levels: We consider the market to be pricing in a seamless restart from COVID-19 lockdown globally , buoyed by mobility data implying a robust recovery in gasoline demand and promising indicators from China. However, whilst gasoline consumption may suggest a V - shape d recovery, this is unlikely to be reflected across the barrel. We expect refinery runs to lag the recovery in product demand as high distillate inventories cap refinery output. There are clear indicat ions that production shut-downs may reverse across the US if prices hold ~$30/bbl. Although we would not expect to see rigs deployed and new wells drilled unless prices move towards the $40-50/bbl range, we do expect to see both rig count s and frac spreads to bottom at these levels. Now the bottom appears to be in for oil prices, given the relatively weak demand outlook, we consider it likely both Saudi and Russia will target a ~$40-50/bbl Brent range as a “fair” price, in order to avoid overstimulating US supply growth. Saudi’s desire to “win the peace” during the post COVID-19 demand recovery will put a natural cap on prices in our view. However, as the requirement for benchmarks to price to shut-in additional non-OPEC supply has been avoided, we have revised our forecasts up from our March updat e with the biggest shifts over the 2Q-20 and 3Q-20 period. We now expect Brent to average $39.1/bbl in 2020, from $32.6/bbl previously. WTI is seen at $36.4/bbl, from $29.5/bbl. We raise our 2021 Brent and WTI forecasts up by $1/bbl to $43/bbl and $39/bbl respectively.