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Big trade houses see persisting oil stocks bubble

Tue, 8th Sep 2020 00:01

* Mercuria CEO says demand may not come back until late 2021

* Trafigura sees both crude and distillates as bearish
markets

By Julia Payne

GENEVA, Sept 8 (Reuters) - Trading firms enjoyed an
unprecedented boom in the first half of 2020 due to extreme
volatility caused by the COVID-19 pandemic but the market's
direction now looks less certain due to high stocks and tepid
demand recovery.

"The market is more complex and nobody knows when demand
will come back. Financial investors are piling into second half
of 2021 or December 2021 (oil futures contracts) on the
assumption demand will be back then," Marco Dunand, chief
executive of Mercuria Energy Trading, told Reuters.

"Coming into the fourth quarter, the expectation was that we
should be drawing 3 to 4 million barrels per day of crude and
products from stocks but the market is not drawing that."

During the peak period of lockdowns in March and April,
traders were forced to hastily store an additional 1 billion
barrels of crude and refined products as oil demand cratered.
Eventually, OPEC and other major producers announced record
output cuts that helped oil prices rebound.

Economic activity began picking up in June but the recovery
has flatlined. Some possible COVID-19 vaccines are undergoing
trials but meanwhile, countries have been forced to re-impose
some restrictions to stop the spread of the virus.

"We see people starting to do floating storage again ... It
will be a problem at some point as we have a massive overhang,"
Dunand said.

"Crude and distillate stocks in particular are building ...
It's a bubble mess."

PATCHY RECOVERY

China is the bright spot in oil markets but its recovery and
that of the rest of the world is uneven and not enough to
consume the overhang.

The United States in particular still has major unemployment
and a growing eviction crisis that will likely cause a cascade
of unemployment as spending stutters, Saad Rahim, chief
economist at trading house Trafigura, said.

Rahim expects more refinery run cuts particularly if China
starts exporting products again, namely gasoline. The summer
driving season in the northern hemisphere was lacklustre and
last week, middle distillates margins <LGOc1-LCOc1> crashed to
the lowest level since the early 2000s. Distillates like diesel
can account for up to half a refinery's output.

"For once, you can be bearish both crude and distillates
because of runs, which normally is not the case. Refinery runs
aren't going to continue recovering so that is a problem for
crude," Rahim said.
(Reporting by Julia Payne; editing by David Evans)

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