The International Energy Agency, which is the OECD’s Energy watchdog, has just released its Oil Report for March 2020. This release coincides with the worst fallout in oil prices in a single day in decades, following the decision of Saudi Arabia this week-end to revise downward Aramco’s oil prices and to flood the market with cheap oil starting from April when the standing OPEC+ agreement expires. The oil market rout translated into a broader fallout for equities all across the world. Meanwhile, yields on governments bonds fell sharply with the US yield curve approaching negative territory across all its maturities.
A quick look at the IEA’s March report
This new monthly edition of the IEA’s flagship publication comes amid increasingly gloomy prospects for the world economy, amid a seemingly irrepressible spread of the coronavirus pandemic. We will come back with more analysis on these two subjects – for an explanation of the coronavirus disease dynamics you can read our earlier article – but our focus here is on the oil market.
Faltering oil demand …
According to the IEA’s March report summary, the coronavirus outbreak has already severely impaired oil demand projections for 2020 against previous forecasts:
Covid-19 (coronavirus) has spread beyond China and our 2020 base case global oil demand forecast is cut by 1.1 mb/d. For the first time since 2009, demand is expected to fall year-on-year, by 90 kb/d. In 1Q20, China’s demand falls by 1.8 mb/d y-o-y with global demand down 2.5 mb/d.
Adding that :
We expect global oil demand to fall in 2020 – the first full-year decline in more than a decade – because of the deep contraction in China, which accounted for more than 80% of global oil demand growth in 2019, and major disruptions to travel and trade.
It added further that “Satellite data show a near 1 mb/d increase in Chinese stocks, reflecting slowing demand.“
All in all :
Data are far from complete but, in the first quarter, the visible decline in transport, industrial and commercial activity points to a massive drop in global oil demand of 2.5 mb/d compared with the first quarter of last year. This includes an estimated annual decline of 4.2 mb/d in February, of which 3.6 mb/d was in China.
… Combined with a massive oversupply
As for supply, the Agency finds out that :
Global oil supply fell by 580 kb/d in February as production from Libya slowed to a trickle. At 100 mb/d, output was virtually flat on a year ago, with non-OPEC gains of 2.4 mb/d offsetting declines from OPEC. Robust non-OPEC supply gains of 2.1 mb/d in 2020 and a contraction in demand cut the call on OPEC crude to 27.3 mb/d.
Alongside its base case of a 90 kbd oil demand decrease in 2020, the IEA also unveiled a more pessimistic low case:
Our pessimistic low case assumes that countries already affected by the virus recover more slowly while the epidemic spreads further in Europe, Asia, and beyond. It takes longer to control the propagation of the virus, and the contraction in Chinese oil demand eases more slowly in March. European demand remains subdued in the third quarter, and demand in the United States grows at a slower pace. In this pessimistic case, global oil demand could decline by 730,000 barrels per day in 2020.
It doesn’t take one to be an oil guru to draw conclusions from this widening unbalance between supply and demand. Oil prices, which fell sharply on down to a low of 30 dollars per barrel for Brent before recovering back to 35, will most likely continue their bearish slide. Unless there is a spectacular turnaround from Russia, whose decision to break away from OPEC initiated a new price war, oil prices might well get into the 20-30 dollars per barrel price range and stay there for months. Incidentally this the price level that is needed to close most US shale oil wells (cf. charts below from the Dallas Fed).
