The International Energy Agency (IEA), has said that global oil supply is expected to drop by 12 million barrels per day in May to a 9-year low of 88 million b/d. This was disclosed in its Oil Market Report for May 2020.
The significant decline for global refining activity has shifted to May, as the April estimate was revised, based on new data and higher demand. In 2020, global runs are expected to fall by 13.4 Mb/d year on year with 2020 average down by 6.2 Mb/d.
From highlights of the report, there was an upward adjustment of 3.2 million barrels per day to the global demand for 2020. This can be attributed to the gradual easing of lockdown measures globally, and better than expected mobility in the Organization to Economic Co-operation and Development (OECD).
This is still sharply down from last year by 19.9 Mb/d. The outlook for 2020 as a whole, shows a demand fall of 8.6 Mb/d, which is 0.7mb/d more than what was in the previous report.
The report stated, ‘’The OECD data for March, shows that industry stocks rose by 68.2 million barrels. The total OECD stocks stood 46.7 million barrels above the 5-year average and due to the weak outlook, now provide an incredible 90 days of forwarding demand coverage.
“Preliminary data show that US crude stocks increased by 53.7 million barrels in April (i.e. 1.8 Mb/d) and crude inventories in Europe and Japan also rose by 3.1 million barrels and 3 million barrels respectively. In April, floating storage of crude oil increased by 9.9 million barrels to 123.8 million barrels.”
According to IEA, oil prices dropped in April based on weak demand due to COVID-19 and record-high middle east exports, especially with the trade war between Russia and Saudi Arabia.
Negative oil futures prices were seen for the first time when WTI sold for -$37/barrel the day before the May contract expired. The easing of lockdown measures in some countries provided support to the gasoline market.
The report noted that in April, the focus was on demand destruction on a historic scale, with little immediate relief expected from the supply side, as the OPEC+ agreement was not due to come into effect until May 1. This was what the IEA Executive Director called ‘Black April’—a month that saw the price of the May WTI futures contract plunge to almost minus $40 a barrel.
The outlook has since improved, with prices starting to rebound, although they are far below where they were before the COVID-19 crisis. This is primarily due to the easing of lockdown measures in some economies and steep production declines in non-OPEC countries alongside the commitments made by OPEC+ agreement.
The gradual relaxation of restrictions on movement with businesses reopening and people returning to work will help boost oil demand. As a result, the 2020 demand forecast, which was set at a 9.3 Mb/d decline for April, has improved to 8.6 Mb/d decline in May.
There are massive cuts in output from countries like the US and Canada, who are outside the OPEC+ agreement. With the OPEC+ agreement coming into effect, it is estimated that there will be a 12 Mb/d reduction in global oil supply, month on month.
So oil production is reacting in a big way to market forces and economic activity beginning a gradual but fragile recovery. However, the major concerns are whether governments can ease lockdown measures without causing a resurgence of COVID-19 outbreaks and whether a high level of compliance with the OPEC+ agreement will be achieved and maintained by all the major parties.