IEA sharply revised their 2020 oil demand figures this week. The monthly report is heavily referenced throughout the industry as one of the premier sources of oil information and global macro conditions.
IEA concluded there will be a year-over-year drop in demand of 29 MMBbl/d in April. Demand would be as low as it was in 1995. IEA said 187 countries have implemented containment measures to stop the spread of COVID-19.
IEA does see a gradual rebound in demand through the end of the quarter. Yet, IEA expects a year-over-year change of 23.1 MMBbl/d for 2Q20, which would still be a record-breaking decrease in demand. Additionally, IEA concluded that whole-year 2020 demand would decrease by 9.3 MMBbld, compared to 2019. This contrasts with EIA’s April Short-Term Energy Outlook projection of a 5.2 MMBbl/d year-over-year decrease for 2020, published only a week earlier.
“"In a few years time, when we look back at 2020, we may well see that it was the worst year in the history of global oil markets” - IEA Executive Director Fatih Birol”Reuters, 4/15/2020
Source article (opens in new tab): Oil market falls too big to offset with output cuts, IEA warns
On the supply side, IEA sees global oil supply plunging 12 MMBbl/d in May. This fall in supply was attributed to the recent OPEC+ cuts. Additionally, another 3.5 MMBbl/d could be removed from the market as low prices cause producers to start shutting-in wells. According to the report, 2020 production should fall 2.3 MMBbl/d on the year as a whole. While this drop in production is substantial and should help support prices, it is still only accounting for 25% of the demand loss IEA expects this year.
But the demand losses are concentrated in the first half of the year, while supply losses happen later. IEA foresees a reversal in the market later this year; the supply/demand imbalance could flip in 2H2020 as demand recovers. Their models imply an average stock draw of 4.7 MMBbl/d in the second half of this year.
AEGIS notes such a pull on storage implies a spot market that could race higher to pull about 5% of worldwide demand out of storage each day. We note these types of scenarios imply a downward-sloping (backwardated) forward curve while prices typically rally.
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