Oil prices have stabilized due to a rebound in demand and the “spectacular” drop in supply, according to a new report from the International Energy Agency (IEA).
The reopening of major economies is “beginning a gradual-but-fragile recover,” the IEA said. The extent of global lockdown orders peaked at 4 billion people, but will drop to 2.8 billion people by the end of May.
Global oil demand fell by around 25.2 million barrels per day (mb/d) in April, a month that the agency previously called “Black April.” For May, demand improves to a fall of 21.5 mb/d compared to the same month a year earlier, evidence that the tepid lifting of restrictions on movement has led to a slight rebound in oil consumption. U.S. gasoline data, for instance, has been inching up this month.
The IEA revised up its global oil demand figure for 2020, projecting a decline of 8.6 mb/d for the year, which is slightly better than the decline of 9.3 mb/d that the agency saw last month. Still, that is the largest decline of demand in the history of the oil market.
But while demand has ticked up, it is the rapid and extreme supply cuts that have pulled oil prices up off of the floor. “It is on the supply side where market forces have demonstrated their power and shown that the pain of lower prices affects all producers,” the IEA said in its report. “We are seeing massive cuts in output from countries outside the OPEC+ agreement and faster than expected.”
The agency said non-OPEC countries could lose 4 mb/d by June, “with perhaps more to come.” And because the OPEC+ deal went into effect in May, total global supply could decline by 12 mb/d in May compared to April.
U.S. shale losses could prove to be more durable. “By year-end, however, it is the United States that is the biggest contributor to global supply reductions compared with a year ago,” the IEA said. U.S. oil production could fall by 2.8 mb/d compared to year-end 2019.
Ultimately, however, the main takeaway from the IEA report was one of a market on the mend, albeit with a long way to go. The agency sees a rapid jump in demand in June and July. Demand doesn’t get back to pre-COVID-19 levels this year, but recovers a good portion of demand loss by the end of the year.
However, this somewhat optimistic outlook weirdly discounts the prospect of a second or third wave of global coronavirus infections, the signs of which are already readily apparent. To be sure, the IEA offers caveats about “uncertainties,” and says that another round of infections poses downside risks to its forecast.
But it isn’t the baseline assumption. “Our global 2H20 forecast assumes the virus is largely under control at the global level and that containment measures do not return on a significant scale,” the report said. Largely under control? No return of containment measures? This is set against a backdrop (at least in the U.S.) where the rate of new infected cases is rising in a lot of places outside of New York, and at the same time, states are moving quickly to lift restrictions on movement.
Meanwhile, on the same day as the IEA report, Dr. Richard Bright, a former top U.S. vaccine official, testified in front of congressional committee, where he warned that the U.S. faced the “darkest winter” because the federal government does not have a coherent strategy. “Our window of opportunity is closing,” Dr. Bright said in his opening statement. “If we fail to improve our response now, based on science, I fear the pandemic will get worse and be prolonged.”
He warned of a resurgence of COVID-19 cases compounded by seasonal influenza later this year. “Without better planning, 2020 could be the darkest winter in modern history.”
He also warned against putting too much hope in the availability of a vaccine within a 12 to 18-month timeframe.
All of that is to say that even at $25 to $30 per barrel – a once unthinkably low price – crude oil might be getting overvalued. The IEA sees a market steadily on the mend, but that’s only true if the pandemic is on its way to some sort of resolution, which, of course, it isn’t.
By Nick Cunningham of Oilprice.com