International Energy Agency executive director Fatih Birol. Picture: REUTERS/Max Rossi
International Energy Agency executive director Fatih Birol. Picture: REUTERS/Max Rossi

New York — The outlook for global oil markets remains uncertain, but with demand a little stronger than expected and supply reined in by a brutal price crash the heaviest destruction may be over, the International Energy Agency (IEA) said on Thursday.

World oil production is on track for a “historic decline” in May to the lowest level in nine years, the IEA said in its monthly report. Opec and its partners are slashing output, while others including the  US have been forced to scale back drilling.

“It is on the supply side where market forces have demonstrated their power and shown that the pain of lower prices affects all producers,” said the Paris-based agency, which advises major economies. “We are seeing huge cuts in output from countries outside the Opec+ agreement and faster than expected.”

It is a stark shift in tone from April, which was called “Black April” by the agency’s chief, when the IEA warned that cutbacks by Opec+ probably were not enough to prevent the world’s storage tanks being overwhelmed by the middle of the year.

Demand shock

The oil market is still in a very difficult position. International crude prices have collapsed by more than 50% since the start of the year as the coronavirus lockdowns ground flights, empty roads and shutter businesses. Yet the price of about $30 a barrel in London now is $10 above April’s lows.

“The picture is still very bleak for the industry,” IEA executive director Fatih Birol said on Twitter. “The heaviest demand destruction may be behind us, but huge uncertainties remain.”

The IEA boosted its estimates for global oil demand in the second quarter by 3.2-million barrels a day (bpd), to 79.3-million bpd. Yet consumption remains on track for a loss of almost 20-million bpd in the quarter, or roughly 20%, from the same period in 2019 due to the pandemic.

For 2020 as a whole, the demand forecast was pushed up by 700,000 bpd, but it still remains on track for an annual plunge of 8.6-million a day, or about 9%.

Oil major BP gave an upbeat take on the demand picture on Thursday, saying it has seen consumption “surge back” this week as supplies have dropped. “We’re seeing a major oil-price correction,” CFO Brian Gilvary said during a Financial Times panel discussion.

Supply decline

Global oil supplies are poised to plummet by 12-million bpd, or about 12%, in May compared with April as an alliance of exporters led by Saudi Arabia and Russia implement deep production cuts. This week the kingdom and other Middle East producers pledged to deepen those curbs even further in June.

Their efforts are being amplified by less deliberate action among producers outside the Opec+ coalition, such as the US and Canada. They have already seen output sink 3-million barrels a day since the start of the year, the IEA said. They could lose another 1-million a day in June, it predicted.

The US’s shale-oil drillers, who are more sensitive to price swings than other producers, have borne the brunt of the losses. By the end of 2020, US production could be down 2.8-million barrels a day, three times the projected drop in Saudi Arabia’s output.

“Activity levels in the shale patch have dropped to record lows and nearly all operators have shut in uneconomic production,” the IEA said.

Some high-cost wells may also be difficult to bring back online once the pandemic has passed. BP, which operates in the US Permian, Eagle Ford and Haynesville basins, said on Thursday that old wells in the so-called Lower 48 will take longer to come back.

Despite a more upbeat tone on the state of global markets, the IEA acknowledged the uncertain outlook. It’s unclear whether governments can resume economic activity without causing renewed outbreaks of the pandemic, and how far the Opec+ alliance will implement promised supply curbs.


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