Oil Price Fundamental Daily Forecast – Don’t Be Surprised if OPEC, IEA Issues Revised Demand ForecastsEarlier in the month both OPEC and the International Energy Agency (IEA) presented forecasts calling for lower demand. Since these reports were primarily based on the virus being contained in China, they are likely to issue revisions to their numbers now that the virus has spread outside of mainland China.
U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading sharply lower on Monday. After closing higher for a second consecutive week on Friday, the market has now wiped out more than 62% of its recent rally and if momentum is any indication, sellers are likely to challenge the multi-month lows hit earlier in the month.
Demand concerns are at the forefront again, but this time expectations of lower demand in Italy and South Korea are joining already dismal expectations from China. While the focus of lower demand in Italy is primarily on local transportation and airlines for tourism, these factors along with lower factory demand in South Korea and China are the main issues that are expected to drive down demand at least in the first quarter.
OPEC and IEA Likely to Revise Forecasts
Earlier in the month both OPEC and the International Energy Agency (IEA) presented forecasts calling for lower demand. Since these reports were primarily based on the virus being contained in China, they are likely to issue revisions to their numbers now that the virus has spread outside of mainland China.
Recently, in a closely-watched report, OPEC cut its forecast for oil demand growth this year, saying the coronavirus outbreak was the primary reason.
The cartel said it now expects 2020 daily oil demand growth to be 990,000 barrels per day (bpd), which is 230,000 bpd below prior forecasts. Expect OPEC to cut demand growth further.
Additionally, the IEA said demand is set to fall year on year in the first quarter for the first time since the depths of the financial crisis in 2009.
In the second quarter it said it expected oil demand to grow 1.2 million barrels per day before normalizing in the third quarter with growth of 1.5 million bpd on likely economic stimulus measures in China.
The second quarter forecast has to change because the virus is no longer only China’s problem, but a major global issue.
OPEC+ Production Cuts
I don’t expect OPEC to make any changes until it meets in March. This is because cutting now would be futile since no one know how bad conditions are, or how bad they are going to get. There are going to be losses, but it’s anyone’s guess how much oil demand will drop.
If OPEC+ cuts now, they could be just chasing the market. I think they are going to wait for conditions to stabilize before making a decision and this may delay the production cuts by months.