IEA says oil outlook improves ‘somewhat’ on easing virus lockdowns, output cuts

PARIS, France – An easing of draconian coronavirus lockdown measures and a spectacular reduction in output are helping the oil market steady after a “Black April,” the International Energy Agency (IEA) said on Thursday, May 14.

“Since then, the outlook has improved somewhat and prices, while still far below where they were before the start of the COVID-19 crisis, have rebounded from their April lows,” it said in its latest monthly report.

The IEA said the focus in its April review was the “demand destruction on a historic scale” caused by the coronavirus pandemic, which slashed consumption just as Organization of the Petroleum Exporting Countries (OPEC) kingpin Saudi Arabia and Russia, its erstwhile OPEC+ group ally, started a price war and pumped even more crude into an already flooded market.

The result – prices at more than 20-year lows, plunging at one point to an unprecedented -$40 a barrel before Saudi Arabia and Russia finally called a halt and agreed to overall production cuts of 9.7 million barrels per day (mbd).

Since then, Saudi Arabia has promised to reduce output further while non-OPEC states – especially the United States – have also slashed production in an effort to stabilize the market.

Recent price recovery is due to “the easing of lockdown measures and – more important – steep production declines in non-OPEC countries alongside the commitments made by the OPEC+ agreement,” the IEA said.

“We estimate that from a recent peak of 4 billion, the number of people living under some form of confinement at the end of May will drop to about 2.8 billion worldwide,” it said.

‘Modest boost to demand’

The IEA said businesses were “starting to reopen gradually and people are returning to work, which will provide a boost to oil demand, albeit a modest one at first.”

On this basis, it now expected global oil demand this year to fall by 8.6 mbd, an improvement on its April estimate of a fall of 9.3 mbd.

The IEA said that on the supply side, “market forces have demonstrated their power and shown that the pain of lower prices affects all producers.

“We are seeing massive cuts in output from countries outside the OPEC+ agreement and faster than expected,” it said.

“This group, led by the United States and Canada, saw output in April 3 mbd lower than at the start of the year. In June, that drop could reach 4 mbd, with perhaps more to come,” it noted.

If the OPEC+ agreement is fully respected, “global oil supply is set to fall by a spectacular 12 mbd in May to a 9-year low of 88 mbd,” it added.

If all the output cuts are implemented, Saudi Arabia in June will pump “an extraordinary 4.4 mbd below April’s record level,” the IEA said.

Over the year, however, it will be the US which will cut output the most, by 2.8 mbd compared with end-2019.

For Saudi Arabia, the fall on that basis will be 0.9 mbd, the IEA said.

If the outlook has  “somewhat improved,” the IEA also warned that “major uncertainties remain.”

“The biggest is whether governments can ease the lockdown measures without sparking a resurgence of COVID-19 outbreaks,” it said.

In addition, the output cuts must stick. – Rappler.com