The oil market is having a slow month after the latest OPEC+ meeting as the latest production policy leaves little room for big surprises in oil balances.
Prices are still locked in a sideways limbo, as bearish Covid-19 developments in some countries compete against bullish economic data and spending projections going forward in US and China.
Although crude import data from China reported growth year on year for the month of March, it is an unfair comparison. March’s Chinese oil imports versus February are down, by a lot, and the data should have a negative effect on prices if any, capping gains instead of offering support.
The market will likely take its most immediate cue from today’s API report on US crude inventories. Oil inventories likely drew the week ending 9 April on increased refinery uptick, so a smaller draw or even a build would be bearish for prices.
As the summer driving season approaches, gasoline stocks should be soon start clearing out of storage, a typical trend in the month of April, so if any builds are reported in road fuels the market may punish oil pricing.
Prices may be gaining today, but there is still a plethora of short-term hesitancy over Covid-19 breakouts and vaccine progress. Lockdowns in India and extended lockdowns in Europe threaten to offset the gains made by the US, UK, and other countries slowly lifting restrictions.
In India, traffic has reportedly come to a standstill as many districts, notably the Maharashtra state, where Mumbai is located, resort to strict lockdowns and curfews to nip the spread of growing Covid-19 cases, which have exploded into exponential-like growth in the past few weeks.
Extended lockdowns in India threaten oil demand in an economy that is key to the global economic recovery.
Rystad Energy estimates that before the pandemic, domestic road and aviation fuels products demand in India was nearing 2.5 million bpd in peak summer months, but then cratered to about 1.4 million bpd in April 2020, and has since only rebounded to about 2.1 million bpd.
Apart from domestic demand, India is an important regional refining hub. As the world’s fourth-largest crude oil refiner, India refinery throughput was nearing 6 million bpd before the pandemic.
After bottoming out at 3.6 million bpd in April 2020, Indian refinery throughput remained low over the summer months, before returning to a pre-pandemic monthly level of 5.0 million bpd in November 2020 and staying steady since.
On a more general note, even though OPEC+ is bringing 2 million barrels per day (bpd) of supply back in the next three months, we assess the policy decision reached in April as marginally bullish for the oil market.
The Brent structure has stayed relatively intact since the OPEC+ decision, but is flirting with flipping to a contango structure. This delicate balance indicates that the current oil price of $64 per barrel is quite a fair price given the current market fundamentals.
We remain bullish that these are temporary market conditions that will eventually give into long-term hope of vaccine campaigns doing their job and some economies returning to normal towards summer.
We expect Brent to nudge up towards $66 per barrel in our base case for the third quarter of the year but see upside risk as our crude balances suggest deep draws for that period, especially in August 2021, unless OPEC+ opens the taps even more.
Our updated oil balances also reflect cautious reason for near-term optimism, before we include near-term downside to Indian demand expectations owing to further lockdowns, which are likely imminent.
For now though, in the crude market we expect deep draws from April onwards, and for the second quarter draws to average -0.9 million bpd, compared to -0.7 bpd before the OPEC+ decision.
The overall liquids products market will be slower to react, and we estimate a -0.3 million bpd balance for the second quarter, still an improvement versus -0.1 million bpd before the OPEC+ decision.
