Global oil demand has been hit hard by the novel coronavirus (Covid-19) and the widespread shutdown of China’s economy.
Demand is now expected to contract by 435,000 b/d in the first quarter of 2020, the first quarterly decrease in more than a decade, according to the latest monthly Oil Market Report of the International Energy Agency (IEA).
For 2020 as a whole, IEA has reduced its global growth forecast by 365,000 b/d to 825,000 b/d, the lowest since 2011. Meantime, growth in 2019 has been trimmed by 80,000 b/d to 885,000 b/d on lower-than-expected consumption in the OECD.
“The crisis is ongoing and at this stage it is hard to be precise about the impact. Our initial view is based on an assumption that economic activity returns progressively to normal in the second quarter of 2020,” IEA said.
“The impact of Covid-19 for oil prices have been sharp: Brent values fell by about $10/bbl, or 20%, to below $55/bbl. Before Covid-19 came along, the market was already nervous in anticipation of a supply overhang of 1 million b/d in the first half of 2020 due to continued expansion in the US, Brazil, Canada, and Norway. Even threats to security of supply, e.g. tension in Iraq, a 1 million b/d fall in Libyan oil production, and force majeure declared for some Nigerian cargoes, had little impact on prices. Now that the demand outlook has weakened, prices have moved significantly down,” IEA said.
“From the point of view of the producers, before the Covid-19 crisis the market was expected to move towards balance in the second half of 2020 due to a combination of the production cuts implemented at the start of the year, stronger demand and a tailing off of non-OPEC supply growth. Now, the risk posed by the Covid-19 crisis has prompted the OPEC+ countries to consider an additional cut to oil production of 600,000 b/d as an emergency measure on top of the 1.7 million b/d already pledged.
“Lower oil prices, if sustained, are also bad news for highly responsive US oil companies, but we are unlikely to see an impact on output growth until later in the year. The effect of the Covid-19 crisis on the wider economy means that it will be difficult for consumers to feel the benefit of lower oil prices,” IEA said.