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Demand recovery supported by rebound in driving activity

Stock overhang, US shale to limit price upside

COVID-19 seen dragging on oil demand into 2021

London — The prospects of a modest but sustained oil price recovery in the coming months are growing as output curbs and a demand rebound from coronavirus lockdowns easing drains the world's oil surplus faster than expected, according to oil analysts.

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On the demand side, signs that the global oil market is rebalancing ahead of expectations are being led by data showing fuel demand is recovering steadily after bottoming out in April when some lockdowns began to be lifted.

Goldman Sachs on Thursday raised its May global oil demand estimate by 1.4 million b/d, citing a better than expected improvement in gasoline demand in key markets such as the US, China and Germany.

Although still some 17 million b/d below pre-COVID levels, Goldman estimates that current global oil demand is up 2 million b/d from the previous week and from a 23.2 million b/d dip at its mid-April low.

ICE Brent crude futures gained more than 3% to over $30/b in early trading Thursday after the International Energy Agency cut its estimate for the coronavirus impact on oil demand this year and said the market may start to rebalance quicker than originally anticipated. Despite the gain, global oil prices remain 55% below levels at the start of the year.

Japan's MUFG Bank said Thursday it sees "upside risks" to its oil price forecasts for the coming months as driving and aviation activity come back from the global lockdown nadir seen last month.

"Our expectation is that oil markets reach the inflection point of the equilibrium of supply equating demand in late May/early June, with a deficit set to follow. It is at this point that we believe that the oil price rally will take a firm hold," the bank said.

MUFG said it sees Brent and WTI at $32/b and $28/b respectively by the end of June, with structurally higher Brent prices of $36/b and $46/b in Q3 and Q4.

Stock overhang

Despite a faster than expected recovery in demand and steep output cuts by OPEC+ and US shale producers, oil price gains could remain limited in the near term due to huge global oil stock overhang and the potential for price-sensitive US shale producers to restart wells quickly, Goldman said.

"We believe that the next stage of the oil market rebalancing will be one of range-bound spot prices with the most notable shifts being a decline in implied volatility as well as a continued flattening of the forward curve without long-dated prices rising yet," Goldman said in a note.

Maintaining its "summer" price forecast of $30/b for Brent and $28/b for WTI, Goldman said improving demand and lower output will likely push the global market into deficit in June before oil stocks start to draw.

"We forecast that excess inventories will have peaked at 1.075 billion barrels with a draw of 60 million barrels in June, both a lower peak and a larger initial draw than we previously expected," the bank said.

While now in less danger of hitting tank tops, global oil stock levels are expected to continue rising in the coming weeks, keeping pressure on benchmark prices and differentials, HSBC said in a note.

The bank forecasts Brent and WTI to average $25/b and $15/b respectively in Q2 before rising to $40/b and $36/b by Q4.

Long, slow recovery

Although the initial demand rebound from easing lockdown is rebalancing the market, the impact of COVID-19 on the global economy will likely weigh on oil demand for at least another year, analysts forecast.

MUFG forecasts that the demand destruction will persist into next year, with oil demand only reaching a pre-COVID-19 rate by Q3 2021.

"Although signs of a recovery in physical oil markets are emerging and supply is responding, the fallout from COVID-19 will be lasting," the bank said. "As the world emerges from lockdowns, a combination of weaker economic growth and lingering impacts of COVID-19 mobility restrictions will still be a drag on the recovery in oil demand, especially jet fuel."

HSBC said it expects oil demand won't reach pre-COVID-19 levels until at least 2022 and does not see global demand surpassing 2019 levels until late 2022 or 2023.

MUFG forecasts Brent futures averaging $43/b and $55/b in 2020 and 2021, respectively.

At the end of April, S&P Global Platts Analytics forecast the physical Brent price would be in the $10-20/b range through Q2, before gradually rising to $45/b by end-2021 with WTI reaching $40/b.