Oil markets this quarter are going to do something they haven’t done in more than 10 years.
That’s the forecast of the International Energy Agency (IEA), a multination group of mostly consuming nations with a monthly report that is watched closely for supply-and-demand trends.
And what the IEA said this month is that because of the effects of the coronavirus, demand for the quarter will be down year-on-year for the first time since the end of 2009, when the comparison was between the first months of the financial crisis in 2008 and a global economy that a year later was still trying to climb out of its ravages.
The IEA’s report said oil demand in the first quarter of this year — which we’re about halfway through right now — will be down 435,000 barrels/day from the first quarter of 2019. To contrast how significant that is beyond realizing how long one needs to go back to find another decline, note that the full-year demand growth between 2017 and 2018 was 1.1 million b/d. For the first quarter of 2018 versus the first quarter of 2019, demand increased 1.6 million b/d. If the EIA is accurate and demand drops to 98.8 million b/d in the first quarter of this year, that will be just 100,000 b/d more than where it stood two years ago, a startling change for a commodity that has consumption usually going up every quarter, every year.
The oil market was already facing a 2020 in which all the forecasts for supply and demand were out of balance for the first half of the year, though moving toward a position of greater balance in the second half. The impact from the coronavirus has taken that gap and blown it wide open.
“Before the Covid-19 crisis, the market was expected to move towards balance in the second half of 2020 due to a combination of the production cuts implemented at the start of the year, stronger demand and a tailing off of non-OPEC supply growth,” the report said. “Now, the risk posed by the Covid-19 crisis has prompted the OPEC+ countries to consider an additional cut to oil production of 0.6 mb/d as an emergency measure on top of the 1.7 mb/d already pledged.”
But that reduction of 600,000 b/d that needs the cooperation of the OPEC+ members has received a cool reception from Russia, the de facto leader of OPEC+. There is an OPEC meeting the first week of March and the issue is not expected to be resolved until then.
In the meantime, the imbalance between supply and demand has become significant. The IEA monthly does not forecast OPEC production. What it does is forecast global demand, non-OPEC supply and a category of petroleum called OPEC NGLs, which are products such as butane and propane produced by OPEC. Those products are petroleum and are part of the supply/demand balance forecast by the IEA.
Subtracting the supply numbers from demand leaves behind the OPEC “call.” It’s the amount of oil OPEC needs to put on the market so that supply equals demand.
With demand down, the difference between what OPEC is producing and the call has become gigantic. For the first quarter, it’s 27.2 million b/d. For the second quarter, it’s 28.3 million b/d. In January, S&P Global Platts reported that OPEC produced 29.08 million b/d, a drop of 470,000 b/d from the month before. And that would still be almost 2 million b/d above the call. (The IEA said OPEC output last month was somewhat less than that, 28.86 million b/d).
The IEA does not forecast prices. But the agency report points out one consequence to the lower prices — good for consumers — is that they would be coming alongside reduced financial activity. “The effect of the Covid-19 crisis on the wider economy means that it will be difficult for consumers to feel the benefit of (a) lower oil price,” the report said.
As for the trucking industry, there’s a significant amount of activity tied to the U.S. oil patch. That’s likely to suffer, the IEA report said. “Lower oil prices, if sustained, are also bad news for highly responsive U.S. oil companies,” the report said. But the IEA also projected that the U.S. oil patch is not likely to see a downturn in output growth until later this year.
All that excess would presumably go into inventories barring cutbacks in output. The IEA reported that at the end of January, global oil inventories were 26.4 million barrels above the five-year average for end-January numbers. That seems like a lot but based on forward OPEC demand; its cover was 61 days of consumption, which is equal to the five-year average.