By Julian Lee
The International Energy Agency, the Organization of Petroleum Exporting Countries and the U.S. Energy Information Administration have all updated their oil market forecasts in the past 10 days and the IEA has extended its view out to the end of 2021. It makes grim reading for producers that might have been hoping for a swift recovery in demand back to the levels seen before the Covid-19 pandemic triggered the biggest-ever slump in oil consumption.
All three agree that worldwide consumption will fall by somewhere between 16.6% and 18% year-on-year in the second quarter of 2020 — although those numbers will be subject to revision for many months to come, as more data emerge. That is the biggest year-on-year drop in oil demand on record by a wide margin and compares with a decline of just 3.4% during the worst quarter of the 2008-09 financial crisis.
Bad as those figures are, the IEA and the EIA are both a little less pessimistic about the depth of the second-quarter demand loss than they were a month ago — OPEC has left its demand estimates unchanged in its latest report from the figures it published in May.
The IEA revised up its second-quarter global oil demand estimate by what, in normal times, would be a huge 2.1 million barrels a day, but still sees it down year-on-year by close to 18 million barrels. The EIA made a similar revision to its demand number for the April-June period.
The changes reflect, in part, the rapid rebound in oil demand in China. The country’s “strong exit from lockdown measures has seen demand in April almost back to year-ago levels,” the IEA noted in its report. However, a new outbreak of the disease in Beijing has shown just how quickly those gains can be reversed, with a rapid drop in vehicle use on the city’s roads, as lockdown measures were reimposed.
The outbreak in Beijing, together with one at a German meatpacking plant and resurgent infection rates in some U.S. states, all act as warnings that the return to normalcy, and with it the recovery in oil demand, will not be smooth. Those concerns are evident in the latest forecasts, particularly from the IEA.
Although the Paris-based group has reduced the depth of the worst of the demand destruction, it has also trimmed the pace of recovery in the second half of the year. It now sees oil demand lagging last year’s level by almost 6 million barrels a day in the third quarter, compared with a gap of less than 5.5 million barrels in its previous forecast, and by nearly 4 million barrels a day in the final quarter of the year.
The IEA’s first forecast for 2021 shows that, by the final quarter of next year, it still expects global oil use to be almost 2 million barrels a day below the level seen during the same period in 2019. The EIA is more optimistic, with its own demand forecast for the period just 340,000 barrels a day below its current assessment for the fourth quarter of 2019.
The demand outlooks highlight the necessity of the output cuts introduced by the OPEC+ group of countries. Compliance with those reductions in May was assessed at 87% and it’s set to improve in the coming months after the group’s laggards were persuaded to compensate for their poor performance by making deeper cuts in the third quarter.
Global oil stockpiles are set to increase by about 1.54 billion barrels in the first half of 2020, according to the IEA. The EIA sees a slightly smaller build of 1.35 billion barrels. And those excess inventories will only start to be drawn down again if producers maintain discipline.
If the OPEC+ output deal is honored in full by its participants and production outside the group doesn’t rebound alongside demand, then about 60% of the inventory built up over the first half of the year should be drawn down again in the second half, both the IEA and the EIA forecasts show. That would still leave somewhere between 530 million and 600 million barrels of excess inventories at the start of 2021. That’s not far off the 730 million barrels amassed worldwide during the three years of the first shale boom, which ran from 2014 to 2106 and ushered in the OPEC+ alliance that was still trying to deal with that glut when the pandemic struck.
The latest forecasts show that producers won’t be able to relax their vigilance anytime soon and the OPEC+ countries will have to hope that their efforts to support oil prices aren’t so effective that they encourage producers outside the group to reopen the taps that they were forced to close when prices slumped.