OPEC cuts 2020 global crude demand forecasts by more than 2m bbl/day

LONDON (ICIS)–OPEC has slashed its expectations for global demand growth this year by 2.23m bbl/day, bringing the total fall in demand growth to 9.07m bbl/day, amid data showing that output by member states increased sharply month on month in April.

The impact of production shutdowns and the lockdown of populations across much of the globe is having a sharp impact on global oil demand, with air, ship and car travel sharply reduced.

The impact is expected to be most severe in the second quarter of the year, with the steepest contractions from European and American countries, the cartel said in its monthly crude market report.

Falls in OECD nations demand account for 1.2m bbl/day of the downward revision for the month.

OPEC is forecasting a global recession of 3.4% for the year, with the US and eurozone expected to see GDP falls of 5.2% and 8% in 2020, with slumps of 6%, 5.1% and 4.5% for Brazil, Japan and Russia.

China’s GDP is expected to expand by 1.3% after recovering from a sharp fall in the first quarter when the pandemic was raging strongest in the country.

Faster-than-expected lifting of lockdown restrictions could mitigate the extent of the demand fall for 2020, OPEC said.

The organisation also sharply revised down non-OPEC supply growth for the year, by 2m bbl/day to a 3.5m bbl/day decline, based on production shut-ins or curtailment plans announced by oil companies, particularly in North America, with 1.4m bbl/day of the decline expected to be the result of US cutbacks.

Industry capital expenditure (capex), including non-OPEC countries, is expected to fall 23% year on year in 2020, to around half of the record high of $741bn seen in 2014, at $353bn.

In 2019, capex stood at $459bn.

OPEC supply levels rose 1.8m bbl/day month on month in April, driven almost exclusively by Saudi Arabia, which increased output by 1.6m bbl/day, ahead of a new production cut agreement coming into effect this month.

The deal between OPEC+ signatories sets out 9.7m bbl/day cuts in May to June, 7.7m bbl/day in the second half of 2020 and 5.8m bbl/day for 16 months from the start of 2021.

Earlier this week, Saudi Arabia set out plans to cut production by an additional 1m bbl/day from June in a bid to reduce the supply overhang in the market that threatens to overwhelm storage capacity.

While lower North American production and OPEC+ production cuts are likely to have some impact in mitigating the extent of the crude demand fall on pricing and supply, tightening is unlikely to be pronounced in the immediate future.

In April., the International Energy Agency (IEA) said demand in May could fall as much as 26m bbl/day, with a market rebalancing slowly starting in June.

The IEA is due to publish its monthly crude oil report on Thursday (14 May).

The introduction of the OPEC+ cuts has had a positive impact on markets this week despite the tepid response when they were announced, with prices ticking up in recent days as supply falls and transportation levels start to increase modestly on the back of easing lockdowns in some countries.

The increase in road transport levels has driven a slight rebound in European gasoil differentials this this week.

Market balance is likely to improve in response to the cuts, but is likely to be a matter of quarters rather than months for substantive progress, according to OPEC.

“The speedy supply adjustments in addressing the current acute imbalance in the global oil market has already started showing positive response, with rebalancing expected to pick up faster in the coming quarters,” OPEC said.

Front page picture: OPEC’s headquarters in Vienna
Source: Photo by Christian Bruna/EPA-EFE/Shutterstock

Focus article by Tom Brown