In its July 2020 Monthly Oil Market report, the International Energy Agency (IEA) revised its forecast for demand this year slightly upward. Due to decline in Q2 2020 being less severe than expected, the report shows an improved outlook for 2020.
“New data confirms that the worst of the demand destruction was in the first half of the year when demand fell by 10.75 million barrels per day (mb/d),” the report states. “For the second half we expect an improvement in the level of decline to 5.1 mb/d.”
The report estimates that global oil demand this year will average 92.1 mb/d. This is down by 7.9 mb/d compared to 2019, showcasing a slightly smaller decline than the forecast in the previous report.
Additional forecasts estimate that in 2021, demand will be 97.4 mb/d, but due to the improved outlook for 2020, the recovery next year is lower at 5.3 mb/d. Average demand will be 2.6 mb/d below the 2019 level with jet /kerosene accounting for three-quarters of the deficit.
The report further points out that In the past few weeks benchmark crude oil prices have been stable with both Brent and WTI hovering around $40 per barrels of oil and the contango seen in both futures curves has flattened. Oil prices have largely stabilized after plummeting in April when futures contracts for some oil actually plunged into negative territory.
The market recovery has been spurred by supply cuts by the Organization of the Petroleum Exporting Countries (OPEC), Russia and producers in the United States.
“Producers around the world slashed production through the second quarter to help prices recover,” OPEC says. “we issued record-breaking cuts as well.”
However, the IEA market report considers factors depicting uncertainty for the industry in that the pandemic is not yet under control.
“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,” the report states.
Despite oil price stabilization, crude demand has since been closely monitored to see whether virus containment and economic re-openings can bolster the critical market. A recovery in economic activity is shown by various indicators, including improved mobility in many regions. The reinstatement of lockdowns shows a risk to the industry through mobility restrictions.
“The latest deteriorating developments in additional COVID-19 cases do not engender optimism going forward,” OPEC states. “The re-instatement of lockdowns stands to drag further travel activity and overall demand. A second wave of the pandemic could damage the oil-demand recovery.”
The report states that while the oil market has made progress since the lows in April, the risk of the pandemic to the market is apparent, and close monitoring of demand is essential for further recovery.