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Overview: Softer Inventory Draws Take Steam Out of Price Rally

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• The oil market sees less refined product demand and rising crude supply but it will stay in a supply deficit through the end of the year, which supports the Brent price but fades prospects of oil rising to or over $80 per barrel. Ongoing tightness can support Brent around $70 (related). The Delta variant of Covid-19 is eroding oil demand growth in the third and fourth quarters when Opec-plus is adding supply every month. Key is business activity in developing economies like China, Indonesia, Japan, Brazil and Russia (related). • The combination of Delta and softer economic growth in the non-OECD, which are closely related, are again delaying the recovery of oil demand from the worst impact of the pandemic. Global oil demand growth has been revised down by 480,000 b/d in 2021 versus 2020, mostly on lower demand in Asia and Latin America. Growth in 2021 is now seen at 5.4 million b/d, but is revised up by 100,000 b/d to 2.9 million b/d for 2021 on the expectation of improving vaccination rollouts and surging demand from economic stimulus. • Oil supply from Opec-plus is rising in the second half of the year, but by less than the monthly 400,000 b/d that oil ministers had agreed Jul. 18 (related). Weaker nations in the Opec-plus alliance are failing to meet their rising production targets. Nigeria, Angola and Malaysia are falling short, but Algeria and even Iraq are struggling. A nuclear deal between the US and Iran is delayed, and so is an increase in Iranian crude exports, which allows other Opec-plus members to tap more of their spare capacity. • Opec-plus’ stated policy is to continue drawing inventories. If they want to draw at a slower pace in the second half of 2021, they can increase crude production (related). They will watch the Brent forward curve for guidance. The front-month Brent premium over supply in six months has narrowed to $2 from $4 in July (related). That signals a narrowing supply deficit -- yet crude will draw as a prompt premium provides no financial incentive to add to inventories. More product curves are moving into a supply deficit as well. This supports refined product prices, and in turn the crude price (OMI Jul.19'21). • A larger than expected 900,000 b/d fall in China’s July refinery runs is responsible for the 200,000 b/d global decline in crude throughput for a total 78.6 million b/d (related). June runs in China were at a record, which made the drop larger. Beijing acting against ‘polluting’ independent refiners has restricted runs (related). That caused lower crude buying from the Mideast and Russia, and a switch in crude flows. More fundamentally, state refiners now plan to lower runs as well. They say that is a reaction to lower product demand. But is also a response to Beijing’s lower export quota for refined products. • July implied inventory draws were muscular at 3.1 million b/d, balances show. These draws are coming down somewhat in August before averaging a still robust 1.4 million b/d in the September-December period. These draws support the crude price. China’s release of crude from strategic stocks and hefty draws from commercial stocks are a warning to Opec-plus not to tighten the market too much. Covid-19 Reshapes Global Oil Balance (million b/d) Q1'21 Q2'21 Q3'21 Q4'21 2021 Demand OECD-34 42.7 44.0 46.8 46.4 44.9 Non-OECD 51.7 51.7 52.9 53.6 52.5 Total Demand 94.3 95.7 99.7 100.0 97.4 Supply Opec Crude 25.2 25.6 26.9 27.7 26.4 Opec NGL/Cond 5.3 5.2 5.2 5.3 5.2 Non-Opec 60.3 62.0 63.0 63.3 62.2 Processing Gain 2.0 2.2 2.2 2.3 2.2 Total Supply 92.8 95.0 97.4 98.6 95.9 Stock Change -1.5 -0.7 -2.3 -1.4 -1.5 Source: Energy Intelligence

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