Demand for oil in 2020 will fall more than previously forecast, as economic recovery from the coronavirus pandemic slows down in the second half amid a spike in infections worldwide, the International Energy Agency (‘IEA’) said on Thursday.
Let us drill down IEA’s most recent Oil Market Report:
The agency revised down its estimates for 2020 global oil demand for the second consecutive month. The Paris-based organization now projects crude consumption to fall 8.4 million barrels per day to 91.7 million barrels per day in 2020. While the quantum of decrease is the largest in history, the newest figure represents 300,000 barrels per day higher demand loss compared with last month’s report. IEA attributed the deterioration to the resurgence of coronavirus cases in a number of countries that is stalling an economic recovery and the ongoing weakness in the aviation sector.
The IEA also said that global demand would rebound in 2021. It is estimated to be about 5.5million bpd higher than this year and the biggest annual jump ever. However, that is still about 3 million bpd short of the 2019 level.
This is because of lingering economic uncertainty driven by the recent increase in COVID-19 cases and a slow pace of recovery in air travel. Per EIA, the degree of recovery in oil consumption is expected to decelerate during this quarter and next driven by localized lockdowns and containment measures. Meanwhile, the usage of distillates such as aviation fuel continues to be weak with air travel remaining essentially grounded.
As far as supply is concerned, the world’s major oil producers continue to curb output in an attempt to tackle a global supply glut and keep prices afloat. However, as a response to the improving oil market fundamentals, the OPEC+ group is tapering their record supply cuts since Aug 1, adding around 2 million barrels of supplies daily.
According to IEA, crude supply increased by 1.1 million bpd last month to reach 91.7 million bpd. This was primarily on account of easing supply cuts, partly offset by lower U.S. production related to the Hurricane Laura-led shut-ins in the Gulf of Mexico upstream and downstream facilities.
For 2020 as a whole, non-OPEC inventories are likely to fall by as much as 2.6 million bpd and then rebound by a marginal 500,000 bpd next year.
Following EIA and the OPEC, IEA became the third energy watchdog to project higher oil demand loss than estimated a month ago. Unsurprisingly, crude has dropped below $40 of late after trading in the low-$40 range since mid-June. In fact, the latest bout of sell-off has pushed the benchmark into correction territory with the contract down more than 10% since its Aug 26 high.
While oil prices have come a long way since the depths of minus $38 a barrel in April, lingering signs of demand weakness are still evident. As long as the coronavirus outbreak continues unabated (as is now the case in India and a second wave across Europe), there will be pressure on the demand side of the equation. The IEA is particularly skeptical about the recovery in global refining throughput.
There are worries attached to the dip in gasoline demand casting a cloud over a recovery. To put it simply, even though gasoline consumption has improved from their pandemic lows, they remain weak. Refinery utilization in the United States remains far below the usual capacity usage at this time of the year.
As it is, during the August-October period, the U.S. refining network in the Gulf Coast experiences regular drops in utilization due to the impact of hurricane shutdowns. Moreover, with the onset of the refinery maintenance season, traders expect the glut to worsen.
As a proof of the bearish environment, downstream operators including PBF Energy PBF, Valero Energy VLO and Phillips 66 PSX have drastically reduced processing capacity to cope with the demand erosion caused by efforts to stem the spread of the coronavirus. Demand has still not picked up to a level where the operators can think of restarting/increasing their refinery work. Meanwhile, Marathon Petroleum MPC announced its plan to indefinitely stop production at its Gallup and Martinez refineries in response to collapsing product demand. More recently, Zacks Rank #2 (Buy) Royal Dutch Shell RDS.A said that it will cease operation at its 110,000 barrel-a-day refinery in the Philippines.
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Overall, IEA fears that demand recovery from the coronavirus pandemic will be sluggish in the second half of 2020. Moreover, the upcoming northern hemisphere winter might see a further escalation in COVID-19 outbreaks, which would complicate things further.
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