|
IEA sees sharply lower oil demand, much uncertainty with COVID-19
Alan Bailey for Petroleum News
The International Energy Agency has issued a revised oil market forecast, taking into account the potential impact of the global spread of COVID-19, the new coronavirus. The virus has already caused a significant drop in global oil demand, triggering a fall in the price of oil. And the recent announcement by Saudi Arabia that it would increase its oil production, following the breakdown of OPEC’s negotiations with Russia over the need to tighten oil supplies, has caused a further crash in the oil price.
A fluid situation It its new oil market forecast, the IEA says that the continuing spread of COVID-19 will constrict travel and broader economic activity, thus causing a decline in oil demand in 2020. However, the situation remains fluid, with “an extraordinary degree of uncertainty” over what the full impact of the virus will be, the agency says. In the IEA’s base case the agency is predicting a drop in oil demand this year, primarily because of lower oil consumption in China and disruption to travel and trade. The last time that IEA assessed a fall in oil demand was in 2009.
In February IEA had predicted a growth in oil demand of 825,000 barrels per day in 2020. Instead, the agency now anticipates demand falling by around 90,000 bpd relative to a total global demand of 99.9 million bpd this year. In the short term, the impact on the oil market will depend on how quickly and effectively governments can contain the spread of the virus, and on the lingering impacts of the global health crisis on economic activity, the agency says.
To accommodate the high levels of uncertainty regarding how the situation will evolve, IEA has also published a more pessimistic low case and an optimistic high case. In the low case global oil demand could drop by as much as 730,000 bpd, while in the high case the demand would increase by 480,000 bpd, a figure still significantly lower than the agency’s February 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, IEA executive director, in a March 9 press release. “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.”
Wide range of sources In constructing its base case for its revised forecast, the IEA pulled data from a wide range of sources, including initial data relating to the impact of the virus on transportation fuel demand, the sector that has been most impacted by the virus. The agency also took into account the Organization for Economic Cooperation and Development’s recent revisions to its estimates of global GDP. The base case also assumes that China succeeds in bringing the spread of the virus under control by the end of the first quarter of this year, but that the number of cases of virus infections will continue to increase elsewhere. And virus containment measures outside China are anticipated to have a lower impact on oil demand than the measures taken in China. The aviation industry is likely to continue to experience a reduction in oil demand because of a continuing contraction in global air travel, the base case assumes.
IEA thinks that the consequence of all of this will be a year-on-year fall in oil demand in China of 1.8 million bpd in the first quarter of this year, but with demand in China recovering somewhat thereafter. Global demand, on the other hand, may drop by 2.5 million bpd in the first quarter, and then continue to deteriorate before seeing a progressive recovery in the second half of the year.
Medium-term outlook Looking further into the future, in its medium-term outlook, the IEA anticipates a sharp rebound in the oil market in 2021, following the contraction in 2020. Thereafter, through to 2025, the agency expects the annual growth in oil demand to slow, because of slowing growth in the consumption of transportation fuels. Between 2019 and 2025 global oil demand will likely grow at an average annual rate of just below 1 million bpd, with a total increase in demand of 5.7 million bpd over that period, IEA says.
The agency anticipates the world’s total oil production capacity increasing by more than 5.9 million bpd during that 2019 to 2025 time period. More than three quarters of this increased capacity would come from oil producers outside OPEC. However, IEA thinks that after 2022 production growth in non-OPEC countries, including the United States, will lose momentum, thus enabling OPEC producers to increase production, to keep the oil market in balance.
Energy transition The medium-term outlook also evaluates the potential impact on the oil market of transitions to clean energy solutions - IEA anticipates global demand growth for gasoline and diesel fuel weakening in response to policies aimed at improving energy efficiency and reducing carbon dioxide emissions. The agency expects, for example, that the use of electric vehicles will become increasingly popular. And, with the impact of the energy transition remaining unclear, many companies are prioritizing short-term projects over the coming years, the agency says.
“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.”
- ALAN BAILEY
|
