American Oil and Gas Reporter - July 2020 - 34

Oil Price Recovery

Q:

Even though 2Q2020 began with unprecedented turmoil
in the financial markets, major stock market indices
staged a sharp rally to close the quarter. Oil prices followed a
similar course, reaching $40 a barrel by the start of 3Q2020.
What factors potentially could hasten or hamper the ongoing
recovery? Where do you see oil prices going from here?
HITTLE: The crucial factor for the second half of 2020 is the
rate of demand recovery. We saw the lowest point for the
decline in demand during April, and since then, it has climbed
steadily. With China ahead of the rest of the world in its
response to the pandemic, it is leading the way in a slow return
to growth next year.
Assuming another global economic shutdown on the scale
of what we saw in the second quarter of this year is avoided,
then we expect continued, gradual recovery throughout 2020 in
most oil products, with the exception of jet fuel, which we
estimate will take a few years to return to 2019 levels as
passengers regain confidence in travel by jet.
With OPEC+ production cuts in place, and demand on a recovery trajectory, we see crude prices reaching an average of
$52 a barrel for Brent in 2021.

Q:

In mid-April, after OPEC and Russia had reached an
agreement to cut production, you stated, "We expect
the second half of 2020 to show an implied stock draw, in contrast
to the record-breaking oversupply of the first half of 2020." Do
you still foresee a sustained pattern of inventory drawdown over
the next six months?
HITTLE: Yes, we do still expect an implied global stock
draw for the second half of 2020. Already, world oil demand
had gone from a sharp fall of 15 million bbl/d year-on-year
during the COVID-related shutdown early in the second
quarter to minus 5 MMbbl/d year-on-year by the end of the
quarter. That is still a dramatic decline. But it also is 10
MMbbl/d more demand during the quarter. At the same time,
OPEC+ producers are aspiring to reduce their output by 9.7
MMbbl/d and U.S. production is also down. U.S. lower-48
crude and condensate production fell 1.4 MMbbl/d from
March to June.

Q:

In April, with lockdown orders in place across the country,
U.S. oil inventories increased by 47 million barrels-the
largest monthly increase on record-and continued to climb to
an all-time high by the end of May. How quickly might stocks be
drawn down to within a normal range?
HITTLE: As high as stocks were this spring, a return of
U.S. crude oil inventories to the five-year average likely will
34 THE AMERICAN OIL & GAS REPORTER

not be seen until the second half 2021. Commercial inventories
are going to be impacted by crude oil temporarily stored in
Strategic Petroleum Reserve sites returning to commercial
inventories in the first half of 2021. Overall, the combination
of significant rollover in lower-48 production, plus our
current tight global market view, leads to a rough return to
the five-year inventory average at some time in the second
half of 2021.

Q:

Global oil supply was outpacing consumption even
before the COVID-19 shutdown. Analysts appear to be
increasingly confident that the market has swung back into
balance, and that demand now is running a little ahead of
supply. How do you assess the supply-demand balance? What
consuming sectors are leading the recovery?
HITTLE: Yes, demand is outpacing supply as of this quarter,
as we expected. Our approach is to forecast supply on a detailed
basis by country and demand on a product-by-product and
sector basis.
Of the oil products, jet fuel is the laggard for recovery. Much
depends on when a workable vaccine is in place, because that
will allow a return of consumer confidence for airline passengers.
Gasoline and diesel consumption levels are showing recovery,
although the rate of economic growth is still a risk since it is
contingent on the easing of shutdowns.

Q:

With demand risk still present, what is the timeline for
U.S. producers to restore the thousands of wells shut in
during March and April? What impact will that have on U.S. production trends? Outside the domestic market, what lessons did
OPEC+ learn in 2Q2020?
HITTLE: For the United States, we expect that virtually all
shut-in and curtailed production will be back on line by late
summer. However, with fewer new well completions taking
place, total production is expected to return to a pattern of
decline by late 3Q and throughout 4Q this year. Rigs are
expected to see a gradual recovery starting in the Permian
Basin as early as Q4, followed by other tight oil plays in
2021. We do not see production growth for the lower-48
occurring until later in 2021. For 2020, in our forecast, lower48 output will fall 400,000 bbl/d year-on-year on an average
monthly basis.
The OPEC+ group has signaled its clear lesson learned from
the price turmoil of March and April. The April 12 production
restraint agreement is in place until April 2022, with a meeting
planned for each month in order to review market fundamentals.
The rate of recovery in oil demand will be the key risk for the
group as it meets each month.
American Oil and Gas Reporter - July 2020

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