COVID-19 spread, sinking prices and growth in energy markets, IEA forecast

“The coronavirus crisis is affecting a wide range of energy markets, including coal, gas and renewables, but its impact on oil markets is particularly severe because it is stopping people and goods from moving around, dealing a heavy blow to demand for transport fuels,” said Dr Fatih Birol, the IEA’s Executive Director. “This is especially true in China, the largest energy consumer in the world, which accounted for more than 80% of global oil demand growth last year. While the repercussions of the virus are spreading to other parts of the world, what happens in China will have major implications for global energy and oil markets.”

Fatih Birol (Executive Director, IEA). © IEA.

In the past few weeks, Covid-19 (coronavirus) has gone from being a Chinese health crisis to a global health emergency. While China has taken strong measures in response to the outbreak, the situation appears to be worsening around the world, with more than 60 countries reporting cases.

Containment measures have resulted in drastic reductions in international and domestic transportation around the world as countries respond to the rapid spread of the virus. While data are still far from complete, IEA explains that 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(millions of barrels per day) 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.

While the situation remains fluid, the IEA expects global oil demand to fall in 2020 because of the deep contraction in China, which accounted for more than 80% of global oil demand growth in 2019. Major disruptions to travel and trade will contribute to the oil market contraction as well. That of 2020 would be the first full-year decline in more than a decade.

The IEA now sees global oil demand at 99.9 million barrels a day in 2020, down around 90,000 barrels a day from 2019. This is a sharp downgrade from the IEA’s forecast in February, which predicted global oil demand would grow by 825,000 barrels a day in 2020.

“The coronavirus crisis is adding to the uncertainties the global oil industry faces as it contemplates new investments and business strategies,” Dr Birol said. “The pressures on companies are changing. They need to show that they can deliver not just the energy that economies rely on, but also the emissions reductions that the world needs to help tackle our climate challenge.”

With extraordinary uncertainty clouding the immediate outlook for the global oil market both on the demand and supply sides, and of course for prices which ended the week $5/bbl (Brent) lower than on the eve of the OPEC+ meeting, the IEA will continue to monitor the situation closely.

Cuts in demand and rise in reserves pushed down ICE Brent price below $46/barrel

ICE Brent fell below $46/bbl (barrel of oil) during 6 March, the lowest level since June 2017. As well as the negative impact on demand of the coronavirus, the outcome of the OPEC+ meeting was seen by traders as a bearish signal.

In February and into March, Chinese run cuts pressured the price of crude from the Middle East and West Africa in particular. Travel restrictions and lower industrial activity due to the virus weighed on cracks for jet fuel, diesel and gasoil.

Global refining throughput in 2020 is expected to decline for the second consecutive year, falling below 2017 levels as demand for transport fuels plunges in the wake of the coronavirus. In 1Q20, refining intake has been revised down by 1.2 mb/d, primarily due to China, where February runs are estimated at 10.1 mb/d, down 2.7 mb/d y-o-y. February margins saw short-lived support from falling crude oil prices.

OECD industry stocks rose by 27.8 mb to 2 930 mb in January as a build in product inventories more than offset counter-seasonal draws in crude stocks. Total oil stocks stood 2.9 mb above the five-year average and covered 63 days of forward demand. Short-term floating storage of crude oil built 1.9 mb in February to 80.2 mb, most of which is owned by Iran. Satellite data show a near 1 mb/d increase in Chinese stocks, reflecting slowing demand.

Global oil supply fell by 580 kb/d (kilobarrels per day) 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. In 1Q20, the call is 25 mb/d, 3.5 mb/d below the group’s assumed output for the period.

Base case global scenario

Covid-19 (coronavirus) has spread beyond China and IEA’s 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. IEA assumes that oil demand returns to close to normal in 2H20. In this Report we provide a Low Case and a High Case detailing weaker and stronger outlooks, respectively.

Two forecast scenarios more

The immediate outlook for the oil market will ultimately depend on how quickly governments move to contain the coronavirus outbreak, how successful their efforts are, and how lingering is the global health crisis impact on economic activity.

The high uncertainty over the course of the outbreak has led IEA toconsidet two different scenarios for their outlook: a) Pessimistic, in which global measures are less successful in containing the virus; b) Optimistic, in which the virus is contained quickly.

Petro China oil station. Photo under public domain.

Both scenarios are based in the following facts: the outbreak is brought under control in China by the end of the first quarter but spreads across many other countries beyond Iran, Korea, Japan, Singapore, the United States and Europe. Containment measures imposed in North America, Europe and elsewhere are expected to have a smaller impact on oil demand than those in China. However, demand from the aviation sector will continue to suffer from the contraction in global air travel.

a) Pesimistic scenario.- Oil demand decline by 730,000 barrels per day in 2020 

In the first quarter, China suffers the most with a year-on-year drop in oil demand of 1.8 mb/d as factories shut down and large-scale confinement measures curb transportation. In the second quarter, as the situation in China improves, demand deteriorates in some other large economies, such as Japan and Europe. Overall, global oil demand in the second quarter is only slightly lower than a year ago. As we move through the second half of the year, demand picks up, growing by 1.1 mb/d compared with the second half of 2019. For 2020 as a whole, the magnitude of the drop in the first half leads to a decline in global oil demand of around 90,000 barrels per day, the first annual fall since 2009.

The pessimistic scenario 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.

b) Optimistic scenario.- Oil demand decline at 480,000 barrels per day in 2020

In a more optimistic high case, IEA assumes that the situation comes swiftly under control in China and the most serious contagion remains limited to a few countries, with no serious impact in most of Europe and North America. In this context, governments do not need to take strong containment measures and use of transport remains closer to normal. In this case, global oil demand could grow by 480,000 barrels per day in 2020.

OPEC Conference recomends extended productuon cut at 1.5 mb/d till the end of 2020 to avoid sinking prices

The OPEC Conferenceheld on 5th March issued a declaration recognising the COVID-19 outbreak has had a major adverse impact on global economic and oil demand forecasts in 2020, particularly for the first and second quarters. Global oil demand growth in 2020 is now forecast to be 0.48 mb/d, down from 1.1 mb/d in December 2019. Moreover, the unprecedented situation, and the ever-shifting market dynamics, means risks are skewed to the downside.
The Conference noted that the further impact of the COVID-19 outbreak on oil market fundamentals needs for further continuous monitoring.

6º OPEC and non-OPEC Ministerial Meeting. © OPEC 2019

Accordingly, in view of the current fundamentals and the consensus on market perspectives, the Conference decided to recommend to the 8th OPEC and non-OPEC Ministerial Meeting to extend the adjustment levels agreed at the 177th Meeting of the Conference and the 7th OPEC and non-OPEC Ministerial Meeting for the remainder of the year. It also agreed to recommend to the 8th OPEC and non-OPEC Ministerial Meeting a further adjustment of 1.5 mb/d until the end of 2020 to be applied pro-rata between OPEC (1.0 mb/d) and non-OPEC producing countries (0.5 mb/d) participating in the Declaration of Cooperation.

IEApoints on the Conference latest communication that a background of collapsing global oil demand, OPEC+ producers met on 5 March to review the market situation. The group’s current 2.1 mb/d of production cuts are due to expire at the end of the month. A statement issued at the end of the meeting made no mention of supply restraint, saying only that further consultations will take place. The implication, therefore, is that the OPEC+ countries will be free to exercise their commercial judgement when assessing future levels of production.

Market evolution after COVID-19 crisis: The medium term outlook till 2025

Leaving aside the COVID-19 2020 scenarios, “…the coronavirus crisis is adding to the uncertainties the global oil industry faces as it contemplates new investments and business strategies,” Dr Birol said. “The pressures on companies are changing. They need to show that they can deliver not just the energy that economies rely on, but also the emissions reductions that the world needs to help tackle our climate challenge.”

 

© IEA.

Following a contraction in 2020 and an expected sharp rebound in 2021, yearly growth in global oil demand is set to slow as consumption of transport fuels grows more slowly, according to the report. Between 2019 and 2025, global oil demand is expected to grow at an average annual rate of just below 1 million barrels a day. Over the period as whole, demand rises by a total of 5.7 million barrels a day, with China and India accounting for about half of the growth.
At the same time, the world’s oil production capacity is expected to rise by 5.9 million barrels a day, with more than three-quarters of it coming from non-OPEC producers, the report forecasts. But production growth in the United States and other non-OPEC countries is set to lose momentum after 2022, allowing OPEC producers from the Middle East to turn the taps back up to help keep the global oil market in balance.

The medium-term market report, Oil 2020, also considers the impact of clean energy transitions on oil market trends. Demand growth for gasoline and diesel between 2019 and 2025 is forecast to weaken as countries around the world implement policies to improve efficiency and cut carbon dioxide emissions and as electric vehicles increase in popularity. The impact of energy transitions on oil supply remains unclear, with many companies prioritising short-cycle projects for the coming years.

Image over the headline.- Texas pumpjack. Image under public domain.

Related external links:

IEA Oil Market outlook March 2020 (executive summary)

IEA Interactive graphic oil market demand evolution 2011-2025

 

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