Oil Price Update – August 2020

Oil markets are suffering from a lack of volume, volatility and speculative interest, which have all contributed to rangebound trading in recent months. Our read of forward fundamentals suggest the large delta between consumption and production (that resulted in robust draws from inventory and major benchmarks settling in the $40s/bbl), will dissipate between August and October, with the market in small surplus (0.43mn b/d) over the period . We attribute this to: - On the supply side, OPEC have begun tapering cuts in August, adding ~2mn b/d back to the market. We expect Iraqi ‘catch-up cuts’ to disappoint . Non-OPEC producers also continue to return economic shut-ins to the market; - The pulse of gasoline consumption growth associated with the return of discretionary travel post ‘hard’ lockdown is expected to attenuate as the Northern Hemisphere driving season winds down. With no obvious candidate to offset moderating gasoline consumption growth in the near term, product demand growth will stagnate from August; - Units in most refining centres will struggle to ramp up runs given stubborn middle distillate inventories. Uneven economic recovery globally is also a challenge , given the dependence on product exports for most regional refining centres. Cutting a disproportionate volume of supply, OPEC + are likely to seek to capture the majority of consumption growth in the coming quarters. With growth slowing, we see a limited call on US tight oil in the near term, a point expressed by numerous management teams on quarterly earnings calls this past week. Upside for oil prices is therefore capped, in the near term. Despite a relatively bearish view on forward balances, we find it likely Saudi (+GCC allies) would backstop the market with additional cuts , as seen May and June , if balances deteriorated markedly. This is more likely as demand for crude burn eases past August. We forecast Brent averaging $43.5/bbl over 2H-20, with WTI at $41/bbl . Turning to 2021, Brent is seen at $49/bbl, with WTI at $46/bbl. We expect prices to rise to incentivis e new tight oil supply by the fourth quarter of 2021, with the market largely capped by high inventories and elevated OPEC + spare capacity before this point.