The oil market is currently undergoing historic shock that is abrupt, extreme and at global scale. The typical seasonal low for refiners, at the end of the first quarter of each year, is being exacerbated by unprecedented destruction in oil demand due to the global spread of COVID-19. In fact, oil demand in 2Q20 has been revised downward by almost 12 mb/d y-o-y, with 60% of the loss coming from transportation fuels, primarily gasoline and jet fuel. The virus containment measures that were mandated and/or implemented by various governments have included far-reaching lockdowns, travel restrictions and social distancing exigencies, which currently affect over 40% of the world’s population. So far, these restrictions have led to tumbling fuel consumption, amid product inventory builds, severely damaging jet fuel markets and driving gasoline margins into negative territory

The severity of the collapse is likely to result in sharper contraction in oil demand, particularly during 2Q20, extending into 3Q20 and 4Q20. In fact, the contraction is forecast to reach 12 mb/d in 2Q20, about 6 mb/d in 3Q20 and about 3.5 mb/d in 4Q20. Challenges for product markets are expected to continue, as plunging demand could prompt more refiners to reduce, or even halt, operations due to unfavourable economics, lack of product storage space or reduced staff availability. Margins could continue to trend downwards, as evidenced in Asia during February, if demand does not pick up soon (Graph 1). Similarly, global refinery intakes dropped by 4.6 mb/d, to reach 76.6 mb/d, a multi-year record low in February, with Chinese operators witnessing most of the downside (Graph 2).

Despite run cuts of nearly 20-30% in most plants, gasoline stocks are on the rise in traditional US export markets, such as Latin America, which are backing out of delivery deals. This will further pressure gasoline markets ahead of the driving season. US refiners are already reporting heavy losses in 1Q20 returns. On the other side of the Atlantic, European refiners are challenged by gasoline and diesel oversupply due to declining fuel import requirements from West Africa and Latin America, as well as stronger competition from US refiners. In Asia, product markets are expected to remain weak during the summer months, as the negative impact of COVID-19 will affect oil demand. India’s transition to Bharat Stage VI fuels, expected to support lowsulphur motor fuels, will likely have an insignificant impact on consumption.

The recovery of economic and industrial activities in China in March prompted some refiners to increase run rates as of mid-March, suggesting that refinery runs could begin recovering globally around June or July, when applying the same timeline. Given this global crisis, the summer product outlook is forecast to suffer from run cuts in the short term and from weak demand in the coming quarter assuming slower recovery. In an effort to alleviate the current stark global oil market imbalance, OPEC and non-OPEC countries participating in DoC convened two extraordinary Ministerial Meetings, on 9 and 12 April 2020, reaffirmed their continued commitment to a stable market, and agreed to adjust downwards their overall crude oil production by a historic 9.7 mb/d, starting on 1 May 2020, for an initial period of two months, followed by an adjustment of 7.7 mb/d until the end of the year and 5.8 mb/d until 30 April 2022. Furthermore, they welcomed the G20 Extraordinary Energy Ministers’ Meeting and their voice of solidarity, and called upon all other major oil producers to provide commensurate and timely contributions to the stabilization of the oil market. The DoC continued its joint efforts, spearheaded by OPEC, aiming at restoring global oil market balance, amidst current uncertainties and volatility, in order to safeguard efficient, economic and secure supplies of oil to consumers and a fair return on invested capital.
Source: OPEC