Oil Gains Ground As IEA Improves Its Oil Demand Forecast

Oil Video 14.05.20.

IEA Expects That Oil Demand Will Fall By 8.6 Million Barrels Per Day

Today, oil gains ground despite the weakness in the equity markets due to International Energy Agency report which stated that 2020 oil demand would contract by 8.6 million barrels per day (bpd) compared to the previous expectation of a 9.3 million bpd contraction.

IEA notes that better than expected mobility in OECD countries as well as the easing of lockdown measures have led to an upward adjustment of demand forecast for the second quarter of this year.

Meanwhile, oil supply is set to fall by 12 million bpd in May as IEA sees OPEC+ countries complying with their new production quotas while production cuts from other countries further decrease available supply.

Indeed, yesterday’s EIA Weekly Petroleum Status report has shown that the U.S. production continues to fall. It is highly likely that the U.S. oil production will continue to slide as current oil prices make many wells uneconomic.

In general, IEA believes the the outlook for oil has improved since April and that production cuts have already played an important role in the stabilization of oil markets.

Coronavirus And Trade War Fears May Put Pressure On Oil

The recent optimism in the oil market is based on the assumption that demand will improve while supply stays at low levels due to the OPEC+ deal and production cuts by non-OPEC+ countries.

For this thesis to play out, economies should start to gradually recover while the virus must remain under control despite the lifting of the lockdown measures.

The recent U.S. Initial Jobless Claims report has shown that the U.S. economy continues to lose jobs at an alarming pace which means that the recovery may take longer than expected.

Another potential problem may come from the trade war front as the U.S. is increasingly disappointed with China’s handling of coronavirus which has wrecked havoc in the world economy.

At this point, the U.S. limits itself to verbal interventions but if it proceeds with real actions like tariffs or sanctions, global trade may suffer at inopportune time, putting additional pressure on oil demand.

Thus, while the IEA report paints a brighter picture than in the previous month, oil traders may still remain cautious as they try to evaluate the speed at which the global economy recovers from the huge blow dealt by the virus.