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IEA Lowers 2020 Oil Demand Forecast on Aviation Weakness
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Demand for oil in 2020 will fall more than previously forecast, as air travel remains seriously curtailed, the International Energy Agency (‘IEA’) said on Thursday.
Let us drill down IEA’s most recent Oil Market Report:
Demand
The agency revised down its estimates for 2020 global oil demand. The Paris-based organization now projects crude consumption to fall 8.1 million barrels per day to 91.1 million barrels per day in 2020. While the quantum of decrease is the largest in history, the newest figure represents 1400,000 barrels per day higher demand loss compared with last month’s report. IEA attributed the deterioration to the ongoing weakness in the aviation sector, which has virtually come to a standstill due to the coronavirus pandemic.
The IEA also cut its 2021 estimate for oil usage by 240,000 bpd from its previous forecast. It said global demand would rebound to an average of 97.1 million bpd in 2021. It is about 6 million bpd higher than this year and the biggest annual jump ever. However, that is still 2.7 million bpd short of 2019 level.
This is because of the slow pace of recovery in air travel. The usage of distillates such as aviation fuel continues to be weak with air travel remaining essentially grounded. Per IEA, air travel in July — a month usually associated with peak holiday flying — was only a third of last year.
Supply
As far as supply is concerned, the world’s major oil producers continue to curb output in an attempt to tackle a global supply glut and keep prices afloat. However, as a response to the improving oil market fundamentals, the OPEC+ group is tapering their record supply cuts since Aug 1, adding around 2 million barrels of supplies daily.
According to IEA, crude supply was up by 2.5 million bpd last month to reach 90 million bpd. This was after Saudi Arabia (the OPEC cartel’s biggest producer and exporter) ended its voluntary additional cuts of 1 million bpd, the UAE exceeded its agreed-upon quota and a number of U.S. producers restarted shut-in production.
For 2020 as a whole, inventories are likely to fall by as much as 7.1 million bpd and then rebound by a marginal 1.6 million bpd next year.
Conclusion
Following EIA and the OPEC, IEA became the third energy watchdog to project higher oil demand loss than estimated a month ago. Unsurprisingly, crude traded down from its five-month high closing on Wednesday. On the New York Mercantile Exchange, WTI crude futures lost 43 cents, or 1%, to settle at $42.24 a barrel.
While oil prices have come a long way since the depths of minus $38 a barrel in April, lingering signs of demand weakness is still evident. As long as the coronavirus outbreak continues unabated (as is now the case in Latin America and India), there will be pressure on the demand side of the equation. In fact, uncertainty around the trajectory of coronavirus forced IEA to turn bearish on gasoline demand in the second half of 2020.
As a proof of the bearish environment, downstream operators including PBF Energy (PBF - Free Report) , Valero Energy (VLO - Free Report) and Phillips 66 (PSX - Free Report) have drastically reduced processing capacity to cope with the demand erosion caused by efforts to stem the spread of the coronavirus. Demand has still not picked up to a level where the operators can think of restarting/increasing their refinery work. Meanwhile, Marathon Petroleum (MPC - Free Report) announced its plan to indefinitely stop production at its Gallup and Martinez refineries in response to collapsing product demand. More recently, Royal Dutch Shell said that it will cease operation at its 110,000 barrel-a-day refinery in the Philippines.
Further complicating things, crude’s rise from the bottom could also encourage the U.S. shale patch to ramp up or resume drilling activities. In fact, the sharp gains in the price have already prompted the likes of Continental Resources and Parsley Energy — both carrying a Zacks Rank #3 (Hold) — to plan a revival of production.
On a somewhat positive note, the IEA saw steady recovery in diesel demand with the lifting of lockdowns resulting in higher industrial activity and freight transport.
Overall, IEA is hopeful that the oil market will continue to tighten through the remainder of 2020, supported by the OPEC+ cuts. At the same time, the agency signed off by saying, “However, ongoing uncertainty around demand caused by Covid-19 and the possibility of higher output means that the oil market’s re-balancing remains delicate."
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IEA Lowers 2020 Oil Demand Forecast on Aviation Weakness
Demand for oil in 2020 will fall more than previously forecast, as air travel remains seriously curtailed, the International Energy Agency (‘IEA’) said on Thursday.
Let us drill down IEA’s most recent Oil Market Report:
Demand
The agency revised down its estimates for 2020 global oil demand. The Paris-based organization now projects crude consumption to fall 8.1 million barrels per day to 91.1 million barrels per day in 2020. While the quantum of decrease is the largest in history, the newest figure represents 1400,000 barrels per day higher demand loss compared with last month’s report. IEA attributed the deterioration to the ongoing weakness in the aviation sector, which has virtually come to a standstill due to the coronavirus pandemic.
The IEA also cut its 2021 estimate for oil usage by 240,000 bpd from its previous forecast. It said global demand would rebound to an average of 97.1 million bpd in 2021. It is about 6 million bpd higher than this year and the biggest annual jump ever. However, that is still 2.7 million bpd short of 2019 level.
This is because of the slow pace of recovery in air travel. The usage of distillates such as aviation fuel continues to be weak with air travel remaining essentially grounded. Per IEA, air travel in July — a month usually associated with peak holiday flying — was only a third of last year.
Supply
As far as supply is concerned, the world’s major oil producers continue to curb output in an attempt to tackle a global supply glut and keep prices afloat. However, as a response to the improving oil market fundamentals, the OPEC+ group is tapering their record supply cuts since Aug 1, adding around 2 million barrels of supplies daily.
According to IEA, crude supply was up by 2.5 million bpd last month to reach 90 million bpd. This was after Saudi Arabia (the OPEC cartel’s biggest producer and exporter) ended its voluntary additional cuts of 1 million bpd, the UAE exceeded its agreed-upon quota and a number of U.S. producers restarted shut-in production.
For 2020 as a whole, inventories are likely to fall by as much as 7.1 million bpd and then rebound by a marginal 1.6 million bpd next year.
Conclusion
Following EIA and the OPEC, IEA became the third energy watchdog to project higher oil demand loss than estimated a month ago. Unsurprisingly, crude traded down from its five-month high closing on Wednesday. On the New York Mercantile Exchange, WTI crude futures lost 43 cents, or 1%, to settle at $42.24 a barrel.
While oil prices have come a long way since the depths of minus $38 a barrel in April, lingering signs of demand weakness is still evident. As long as the coronavirus outbreak continues unabated (as is now the case in Latin America and India), there will be pressure on the demand side of the equation. In fact, uncertainty around the trajectory of coronavirus forced IEA to turn bearish on gasoline demand in the second half of 2020.
As a proof of the bearish environment, downstream operators including PBF Energy (PBF - Free Report) , Valero Energy (VLO - Free Report) and Phillips 66 (PSX - Free Report) have drastically reduced processing capacity to cope with the demand erosion caused by efforts to stem the spread of the coronavirus. Demand has still not picked up to a level where the operators can think of restarting/increasing their refinery work. Meanwhile, Marathon Petroleum (MPC - Free Report) announced its plan to indefinitely stop production at its Gallup and Martinez refineries in response to collapsing product demand. More recently, Royal Dutch Shell said that it will cease operation at its 110,000 barrel-a-day refinery in the Philippines.
Further complicating things, crude’s rise from the bottom could also encourage the U.S. shale patch to ramp up or resume drilling activities. In fact, the sharp gains in the price have already prompted the likes of Continental Resources and Parsley Energy — both carrying a Zacks Rank #3 (Hold) — to plan a revival of production.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
On a somewhat positive note, the IEA saw steady recovery in diesel demand with the lifting of lockdowns resulting in higher industrial activity and freight transport.
Overall, IEA is hopeful that the oil market will continue to tighten through the remainder of 2020, supported by the OPEC+ cuts. At the same time, the agency signed off by saying, “However, ongoing uncertainty around demand caused by Covid-19 and the possibility of higher output means that the oil market’s re-balancing remains delicate."
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through Q2 2020, while the S&P 500 gained an impressive +44.0%, five of our strategies returned +50.9%, +93.8%, +122.2%, +153.0%, and even +156.8%.
This outperformance has not just been a recent phenomenon. From 2000 – Q2 2020, while the S&P averaged +5.5% per year, our top strategies averaged up to +51.7% per year.
See their latest picks free >>