Re-imposed lockdowns, rise in Covid-19 cases cast shadow on crude oil market - IEA

Author: Jonathan Lopez


LONDON (ICIS)--Re-imposed lockdowns in Latin and North America and the pandemic’s resurgence are “casting a shadow” over the outlook for global crude-oil rebalancing despite output continuing to fall at pace in June, the International Energy Agency (IEA) said on Friday.

The IEA certified that economic activity is recovering and the worst for the oil market may have passed after the historic falls in demand in April and May as up to 4bn people were placed under some sort of lockdown to contain the spread of the coronavirus.

However, the pandemic is far from over; in fact, the World Health Organization (WHO) warned on Friday it is accelerating.

“The strong growth of new Covid-19 cases that has seen the re-imposition of lockdowns in some regions, including North and Latin America, is casting a shadow over the outlook [for the oil market],” said the IEA.

“Only time will tell if the economic impact will be serious. In the meantime, in the past few weeks benchmark crude oil futures prices have been remarkably stable, with both Brent and WTI hovering around $40/bbl and the contango seen in both futures curves has flattened.”

Crude oil producers in the OPEC+ group continued to reduce output – especially Saudi Arabia, which reduced more than anticipated – but production in the US also fell as the country battles the pandemic-induced economic fallout.

According to the IEA, the fall in demand during the first half of the year – down by 10.75m bbl/day, compared to the first half of 2019 – will lessen in the second half, with a year-on-year decrease of 5.1m bbl/day.

Although the agency revised up slightly its forecast for demand this year, after the a better-than-expected fall in the second quarter, the figure remains historic – at an average of 92.1m bbl/day, demand for crude oil would be 7.9m bbl/day lower than in 2019.

“For 2021, we have made some minor adjustments to our outlook and demand will be 97.4m bbl/day; but due to the improved outlook for 2020 the recovery next year is lower at 5.3 mb/d. Average demand in 2021 will be 2.6 mb/d below the 2019 level with jet/kerosene accounting for three-quarters of the deficit,” said the IEA.

Air travel has been one of the industries most affected by the pandemic as both business and leisure travel came to a standstill during lockdowns; a change in business travel habits, expected to stay, will continue haunting the sector.

Despite depressed demand, the fall in output could achieve a market rebalancing as soon as the second half of 2020, said the agency.

Global supply fell by 2.4m bbl/day in June to a nine-year low of 86.9m bbl/day due to the “robust compliance” with the agreement to cut output by OPEC+ together with steep declines in the US and Canada.

Since April, global oil output has been reduced by 14m bbl/day and if the OPEC+ cuts were to stay in place as agreed, by the end of 2020 supply would be 7.1m bbl/day lower than in 2019, recovering in 2021 by 1.7m bbl/day.

A sharp fall in crude oil stored in floating space could be showing certain market rebalancing; in June crude stored fell by 34.9m bbl, reducing the all-time figure in May of 176.4m bbl.

However, commercial stocks built rose by 24.7m, at an average of 800,000 bbl/day.

“A tightening crude market balance and a flatter forward price curve reduced the incentive to store oil,” said the IEA.

“Crude prices increased in June for the second successive month … In the case of ICE Brent [the crude oil international reference], we even saw a few days of backwardation in June. Futures markets are anticipating a transformation in the oil market from substantial surplus in the first half of the year to a deficit in the second half,” said the IEA.

Despite all the nascent signs of a rebalancing, the IEA concluded with a sombre outlook regarding the crude oil market.

‘Black April’ may not be repeated, but the large and accelerating number of coronavirus cases in many countries is a “disturbing reminder” that the pandemic is not under control, making the IEA’s outlook “almost certainly” to the downside.

Front page picture: Bangkok's Suvarnabhumi International Airport, earlier in July as international passengers started returning
Source: Narong Sangnak/EPA-EFE/Shutterstock