Market rebalancing, recovery under way

May 1, 2020
The COVID-19 pandemic has forced millions of people across the world to change the way they live and work.

The COVID-19 pandemic has forced millions of people across the world to change the way they live and work. This has led to a precipitous decline in oil demand due to lower air and road transportation, and thus downward pressure on oil prices. The OPEC+ agreement, sealed via videoconference on April 12, is an important step toward rebalancing the market, but it will be a gradual process over the next several months.

The agreement calls for a reduction of 9.7 MMb/d from May 1 until June 30, 7.7 MMb/d until December 30, and then 5.8 MMb/d for a subsequent 16-month period. Other producers outside the agreement may also see their output fall in the coming months due to the impact of the lower oil prices.

This should help to reduce the supply overhang and build-up in storage, but it will not immediately bring supply in balance with the rapidly declining demand.

The International Energy Agency (IEA) in its April oil report projected oil demand to fall by 29 MMb/d in that month year-over-year, which would be the lowest level since 1995. Demand would gradually recovery to 2.7 MMb/d down in December and close out the year down a record 9.3 MMb/d.

Equally daunting is the economic outlook. The International Monetary Fund in April projected that the impact of COVID-19 would cause the global economy to contract by 3% this year, which is worse than the contraction recorded during the 2008-2009 financial crisis.

Oil company operators have responded to the deteriorating economic conditions with cuts to capex plans for 2020, many in the range of 20-30%. This includes pushing some project sanctions to next year or beyond.

Oil demand should improve when the stay-at-home and physical distancing restrictions loosen, and business and travel pick up again. At the time of this writing, some countries were beginning to rollout plans to reopen their economies, and with government-sponsored stimulus packages to support the recovery.

The IEA forecasts that the second half of this year could see demand exceed supply if the recovery plays out as expected. Key signals to keep an eye on are the level of compliance by OPEC+, oil storage inventories, and any improvements in global economic activity.