As H2-2020 begins to unravel, we believe the world is on a better balance of supply and demand, which will determine the trajectory of oil prices. On the supply side, OPEC+ decided to extend the 9.7mb/d cuts by one month into July (now 9.6mb/d with the exclusion of Mexico’s 100kb/d), before entering the next phase of production cuts, in which output will be reduced by 7.7 Mb/d.
On the other hand, the dynamics on the demand side are dependent on the progression of the COVID-19 disease and how soon activities can return to normal. With several economies gradually easing restrictions, as well as stimulus measures by governments to spur business and industrial activities, demand is likely to improve in H2-2020.
However, given the absence of a vaccine, the level of activities is expected to remain low throughout 2020 compared to 2019.
Notably, the OPEC projects that oil demand will rebound to about 92.3mbpd in Q3-2020 from 81.3mbpd in Q2-2020, bringing average demand in 2020 to 90.6mbpd, 10.0% lower than 99.7mbpd from 2019.
In all, we believe that oil prices will hover around $35.0/b to $45.0/b, as a full recovery in demand remains hinged on the development of a vaccine, and the non-materialization of a second wave of the pandemic.
United Capital Plc Research