Abu Dhabi, UAEWednesday 2 December 2020


The worst for the oil markets may be behind us: here's why

The heaviest demand destruction seen in Q1 is over says IEA as lockdown measures continue to be eased

A fracking site operated by Exxon in New Mexico. Crude output in the US, the world's largest producer of oil and gas will average 11.7m bpd in 2020. Reuters
A fracking site operated by Exxon in New Mexico. Crude output in the US, the world's largest producer of oil and gas will average 11.7m bpd in 2020. Reuters

The coronavirus pandemic dealt a severe blow to the global oil and gas sector, which recovered after four years of Opec+ action. As consumption slumped in China, the world’s biggest oil importer and countries around the world grounded air transportation, demand forecasts for oil turned increasingly gloomy. Prices fell nearly 80 per cent in April from their January peaks

However, with countries easing or beginning to relax lockdown measures, the doom and gloom forecasts around the oil market appear to be reversing. Bank of America Securities sees traffic congestion data on the rise even as it forecasts a demand contraction of nearly 10 per cent, or 10 million barrels per day.

"Traffic congestion data shows China road traffic is back to pre-Covid-19 levels with Beijing traffic well above. The China experience suggests that as lockdowns ease, the road will be the preferred transport mode for commuters and travellers," the bank said in a note.

"While the pandemic continues to see shelter-in-place restrictions across the Americas, we have already seen sustained increases in road congestion levels in Europe over the last four weeks."

We take a look at the most recent forecasts for demand and supply for the second quarter.

Heaviest demand destruction is over

The International Energy Agency (IEA), whose forecasts from the beginning of the coronavirus pandemic have been extremely cautious, softened its annual and second-quarter outlook.

The Paris-based agency revised its annual demand forecast up by 700,000 bpd, bringing the decline to 8.6m bpd. The IEA had previously forecast a decline of 9.3m bpd for 2020.

The agency revised its second-quarter projections up, but noted demand for the period was still sharply down by 19.9m bpd. That compares with an earlier decline projection of 23.1m bpd.

The latest figures offer a more hopeful assessment of demand fundamentals.

Bleak indications

The Organisation of the Petroleum Exporting Countries (Opec), which began cutting back supply by 9.7m bpd as of May alongside non-members, led by Russia, offered a grimmer outlook of market fundamentals.

Its forecast for May was revised down by 1.2m bpd, with demand expected to plunge 5.19m bpd on a year-on-year basis.

The revision was on the basis of "bleaker indications" for the transportation sector in the Organisation for Economic Cooperation and Development countries.

Oil demand from non-OECD countries is also set to plunge 3.88m bpd, a further 1.03m bpd downward revision from the previous month's projection.

Steep declines in US production

Crude output in the US, the world's largest producer of oil and gas will average 11.7m bpd in 2020.

Output is estimated to further decline by 800,000 bpd in 2021, which would mark the first annual decline since 2016.

US production hit a record of 13m bpd last year but low oil prices have resulted in several shut-ins, with rig counts declining to their lowest level last week since September 2009.

"US crude oil production has not declined for two years in a row since the 17-year period of declines beginning in 1992 and running through 2008," the Energy Information Administration (EIA) said.

The agency expects Brent, the international crude benchmark, to average $34 per barrel in 2020, nearly half its value last year.

It forecasts Brent to pick up to $48 per barrel in 2021 - an upward revision of $2 from its forecast last month.

The EIA expects declining global inventories from Opec+ action and shut-ins to exert upward pressure on prices next year.

Updated: May 17, 2020 09:18 PM

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