Oil Tests Recent Lows As IEA Predicts Huge Hit To Oil Demand

Oil Video 15.04.20.

Oil Demand In April Will Be Lower By 29 Million Barrels Per Day Compared To April 2019

International Energy Agency has recently published its April Oil Market Report which put additional pressure on oil prices.

IEA expects that global oil demand will fall by 9.3 million barrels per day (bpd) for the full year 2020. The hardest hit will come in April, when demand will fall by 29 million bpd compared to April 2019.

In the second quarter, IEA expects a demand hit of 23.1 million bpd. In this situation, the production cut deal will not be able to offset the decline in demand in the near term.

IEA believes that as the world starts recovering from the coronavirus crisis, the production cut deal would become more effective, and there’ll be a deficit of supply in the second half of this year.

This deficit should help reduce the huge overhang of supply in storage which will be built in the first half of this year.

IEA forecast implies that the world will progressively get back to normal life in the second half of this year, while major countries will increase purchases of oil for strategic reserves to ease the oversupply situation.

New Lows Ahead?

Even in the above-mentioned scenario which can be considered as optimistic, the short-term situation is very challenging for oil. It remains to be seen whether oil production cuts will be implemented fast since some countries may struggle to quickly adjust their production due to technological constraints.

The other area of uncertainty is the duration of virus containment measures. While the markets were recently optimistic about the potential reopening of European economies, no one knows how much time will be required to get back to normal.

Also, the size of the near-term supply/demand imbalance is almost guaranteed to put additional pressure on oil prices. At this point, the oil market needs increased speculative activity from those who are willing to bet on oil price upside combined with physical purchases of oil for strategic reserves, which should be done as quickly as possible.

I’d also note that the size of the disruption done by coronavirus makes it very hard to accurately forecast oil demand in the coming months. Thus, major surprises are possible, and oil price volatility is guaranteed.