Few have a better watchtower over oil demand dynamics like Joe Gorder, chief executive officer of major U.S. refiner Valero Energy or Marco Dunand co-founder of Mercuria Energy.
This week Gorder and Dunand didn’t even need their business insight to know that fuel consumption was starting to recover in America and some key economies around the world.
They both believe the global oil market was turning the corner, but then, relief will be far coming for oil dependent nations like Nigeria reported by the Wall Street journal to have cut oil production far more aggressively than any other producer.
“People are starting to get out more,” Gorder said. “I think there probably is a pent-up demand for folks to get out of their houses and get mobile.”
From the streets of San Antonio to Barcelona and Beijing, traffic data, sales at fuel stations, and pipeline flows all suggest that the slump in oil demand probably bottomed out around the middle of April, and has now started a modest — and very tentative — recovery.
The signs matter beyond the petroleum industry as they provide a glimmer of hope after a torrent of negative economic data.
“I believe we have seen the bottom,” said Dunand who has helped build Mercuria into one of the world’s top-5 oil trading houses.
The crash in US crude prices into negative territory in April served as a wake-up call for the industry, which had responded by “aggressively” cutting back output.
“There is a certain inertia to closing fields and wells . . . because there is a cost to close and reopen,” Dunand told journalists. “But I think the scare of Monday [April 20] made some people realise they were better off leaving oil in the ground.”
The Wall Street Journal said the crash in oil prices and the economic fallout pose an existential threat for Nigeria. The report titled “oil price slump, Coronavirus create perfect storm for Nigeria,” said “Nigeria, a country of 200 million is slashing production faster than any other major oil economy following the precipitous plunge in global prices.
“Cargo ships full of millions of barrels of Nigerian crude have nowhere to go, with much of the world on lockdown. Nigerian oil companies are desperately competing to fill the last few empty tankers…”
For Africa’s most populous nation, the fiscal dislocation will continue because traders believe the oil market recovery will be extremely slow. Some say it’s likely to take more than a year, and perhaps much longer, before global demand reaches the pre-pandemic levels of roughly 100 million barrels a day. A growing minority even speculate it may never get there again.
The sheer scale of the demand destruction — about 30 million barrels a day in April — means the comeback is going to be a painful process. The International Energy Agency estimates that consumption will be down 25.8 million barrels a day in May, and 14.6 million in June. In December, it would still be 2.7 million a day below 2019 levels.
“We’re seeing improvements really across all three markets, we’ve seen in May volumes trending up in Europe, we see that happening in the U.S., and we see that also in Asia,” Darren Woods, CEO of Exxon Mobil Corp., told investors on Friday. “There are some, I’d say, encouraging early signs.”
Brent traded at $25.91 a barrel early Monday while the US grade WTI was quoted for $18.28.
The improvement is coming at a time when around 3m barrels a day of North American output is being curtailed because of low prices and limited pipeline capacity. ExxonMobil and Chevron each announced shut-ins of up to 400,000 barrels per day on Friday, much of it from their US shale businesses.
“Globally, we are at the inflection point where we are past the worst for oil demand destruction but not for supply destruction,” Olivier Jakob, managing director at consultant Petromatrix GmbH. “This should help price stabilization.”
The recovery process will take time, with unsold crude and oil products likely to accumulate well into June and perhaps even July. Storage tanks are nearly full, and brings with it the risk of New York crude gyrating wildly again when the June futures near expiry in the middle of this month, mirroring what happened when the May contract ended and sent prices below zero.
Even so, the physical oil market, where actual barrels change hands, is showing tentative signs of recovery, particularly in Europe. Urals, Russia’s flagship export grade, has risen to a premium over Brent after Moscow cut exports to a 10-year low.
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