The spread of COVID-19 has disrupted the global oil market balance in 2020, pushing global oil inventories to a record high. Indeed, the accuracy of oil storage data is impacted by many factors including time lags and estimation approaches.
While OECD oil inventory data is regularly updated through national government reporting systems, assessing inventories in non-OECD countries is particularly challenging, as it requires estimations based on a mix of official data and own assessments, complemented by the JODI database.
In the first three quarters of 2020, the massive global stock build came as oil demand contracted sharply, by 10.7 mb/d, compared to the same period in 2019, outpacing the 5.4 mb/d decline in global oil supply during the same period (Graph 1).
The decline in global supply was due to OPEC Member Countries voluntarily reducing their average production by 3.5 mb/d, compared to the same period a year earlier, and non-OPEC participants in the Declaration of Cooperation (DoC) voluntarily reducing their average production by 1.2 mb/d. At the same time, other non-OPEC oil producing countries reduced their supply by about 0.6 mb/d.
Despite these production reduction efforts, global inventories have registered a sharp build, as OECD Graph 1: World oil demand and supply changes, 2020 vs. 2019 (1Q-3Q average) stocks saw a build of around 290 mb, while non-OECD stocks are estimated to have built by about 540 mb.
Furthermore, the oil futures curve flip into contango in March 2020 made it profitable for traders to purchase relatively cheap crude barrels to store at sea, in order to sell forward.
In addition, the lack of demand for oil resulted in cargoes being stuck at destination ports, waiting for discharge orders. Therefore, in the first three quarters of 2020, oil-at-sea is estimated to have risen by 162 mb, or around 0.6 mb/d. With this, total global inventories have surged by more than 1 billion barrels since the beginning of this year.
In anticipation of this market imbalance, the OPEC and participating non-OPEC oil producing countries of the DoC reached a landmark decision for production adjustments in April 2020, as a necessary and timely response to the urgent need to support market stability.
This historic effort focused on accelerating the drawdown of the global stock overhang in order to bring forward market rebalancing.
As a result, between the end of 2Q20 and the end of 3Q20, global inventories declined across all components by around 250 mb. It should be highlighted that, without the DoC production adjustments, global inventories would have continued rising.
Instead, OECD commercial inventories – which act as a key indicator of market fundamentals – have fallen between end-2Q20 and end-3Q20 by 44 mb, the bulk of which was crude stocks. Similarly, non-OECD inventories are estimated to have declined by around 55 mb over the same period.
Meanwhile, oil at sea, including floating storage, has also fallen, dropping by about 150 mb. Graph 2: OECD commercial oil inventories The high conformity levels of the DoC participating countries to their voluntary adjustments have gradually scaled back high oil inventory levels.
However, given the renewed lockdown measures implemented in several major economies, the market situation requires vigilance and continuous close monitoring in order to take into account the large uncertainties going forward.
The 180th Meeting of the OPEC Conference and the 12th OPEC and non-OPEC Ministerial Meeting will convene on 30 November and 1 December, respectively, to further assess market developments and consider how best to continue relentless efforts to maintain oil market stability.