Oil Recovery Will be Slow and Painful: IEA

Oil prices are once again at near two-decade lows, after the International Energy Agency (IEA) warned on April 15 that global oil demand would plunge 29mn b/d year on year (yr/yr) in April as a result of travel restrictions and other Covid-19 lockdown measures.

Opec and its allies forged a landmark deal on April 12 to take 9.7mn b/d of global supply offline in May and June. As production in April was higher than baseline levels the cuts were set against, the actual reduction in May will be 10.7mn b/d, the IEA estimates. China, India, South Korea and the US have taken steps to expand storage volumes, and non-Opec+ producers are expected to scale back output by a further 3.5mn b/d over the coming months, with Canada and US likely to be the biggest contributors.

Efforts on the supply side over the past week are "a solid start,"  the IEA said, but "there is no feasible agreement that could cut supply by enough to offset such near-term demand losses."

The road to recovery will be long, with oil demand expected to be down 26mn b/d yr/yr in May and 15mn b/d in June. Even in December, the IEA forecasts that consumption will still be 2.7mn b/d lower than the level a year earlier. Full-year demand is slated to drop 9.3mn b/d, erasing almost a decade of growth.

"The measures announced by Opec+ and G20 countries won't rebalance the market immediately," the IEA said. "But by lowering the peak of the supply overhang and flattening the curve of the build-up in stocks, they help a complex system absorb the worst of this crisis, whose consequences for the oil market remain very uncertain in the short term."

Even so, the implied stock build-up of 12mn b/d in the first half of the year still could "overwhelm the logistics of the oil industry – ships, pipelines and storage tanks – in the coming weeks," the agency said. "Available capacity could be saturated in mid-year, based on our market balances."

Bottlenecks in logistics chains have already emerged, and chartering costs for very large crude carriers have more than doubled since February, it said. 

"Never before has the oil industry come this close to testing its logistics capacity to the limit."

While low oil prices would normally be a boon for consumers, they are of little benefit to the 4bn people currently in lockdown. Meanwhile, global upstream capital expenditure is expected to slump 32% in 2020 to $335bn – its lowest level in 13 years.

"This reduction of financial resources also undermines the ability of the oil industry to develop some of the technologies needed for clean energy transitions around the world," the IEA said.

As of press time, Brent CO1 futures are trading at $27.60/b, whereas West Texas Intermediate (WTI) is at $20.10.