The outlook for the global economy continues to darken, and a growing number of analysts see oil demand contracting in 2020.
Despite the recent rebound in oil prices - largely stemming from the first 50 basis point interest rate cut since the global financial crisis and expected OPEC+ cuts - the coronavirus is showing no signs of slowing down.
Monetary loosening was initially welcomed by the market on Tuesday, but the rally quickly faded. "The move, which was perceived as a sign of (for lack of a better word) desperation, spurred the first-ever sub-1% yield on the U.S. 10-year bond. But equities responded by erasing the bulk of Monday's rally," Raymond James wrote in a report on Wednesday. "COVID-19 is fundamentally a public health problem, and it will ultimately require a medical solution rather than a monetary one."
Other central banks around the world quickly followed in the Fed's footsteps. But while looser monetary conditions can cushion the blow to the economy, widespread quarantines, factory shutdowns and travel restrictions have substantially cut into oil consumption.
"While such cuts will help normalize oil demand and inventories later this year, they can't prevent an already started large oil inventory accumulation," Goldman Sachs wrote in a note. "Further, the expected size of the OPEC+ cut of c. 1.0 mb/d will remain well short of our newly increased -2.1 mb/d expected global demand loss in 1H alone."
The investment bank once again slashed its oil demand forecast, this time down to -0.15 million barrels per day (mb/d). That is, the bank sees demand contracting this year by 0.15 mb/d, down from expected growth of 0.55 mb/d previously, and 1.1 mb/d in a pre-coronavirus estimate. "Given this higher demand hit, we are once again lowering our oil price forecast, expecting Brent prices to trough in April at $45/bbl before gradually recovering to $60/bbl by year-end," Goldman said. Related: OPEC Source: No Wednesday Deal
If oil demand contracts in 2020, it would mark only the fourth time that has occurred in 40 years.
FGE, a consultancy, also predicts a contraction of about 220,000 bpd this year.
Negative demand growth was an extremely pessimistic outlook until only the past few days. That view is now rapidly becoming the prevailing wisdom, or at least a very reasonable prediction, rather than an outlier.
IHS Markit said on Wednesday that oil demand will fall in the first quarter "by the largest volume in history - even exceeding the declines during the 2009 financial crisis." The firm sees oil demand contracting by 3.8 mb/d in the first quarter, a downward revision of 4.5 mb/d from a prior forecast.
"Never before has such a quarterly drop been recorded," IHS Markit wrote.
But lower prices will also feed back into supply. U.S. shale drillers are largely unable to make money at these price levels, and the financial pressure continues to mount. "[W]e reduce our US shale production forecast by 0.15 mb/d and 0.25 mb/d inn3Q and 4Q20 respectively given lower expected prices and increases in producers' cost of capital due to sharply lower equity prices and wider energy credit spreads," Goldman analysts wrote in their report.
However, the more pronounced slowdown for U.S. shale remains "well short of the expected demand loss, with a 1H20 remaining global surplus forecast of 1.65 mb/d," the bank said.
OPEC+ has its work cut out for them. They are gathering in Vienna, behind closed doors due to the coronavirus. Analysts now see cuts of around 1 mb/d as the most likely scenario. Bloomberg reported that the group was considering a cut as large as 1.5 mb/d, but that there was no agreement yet.
That will help limit the surplus, but it is very far from clear whether it will be sufficient to head off another downturn.
By Nick Cunningham of Oilprice.com
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Comments
Still, the net result is a growing glut in the global oil market. The glut can only start to deplete fast once the outbreak is contained and the global economy is out of quarantine.
Until the outbreak is contained, no one can accurately assess its adverse impact on global oil demand. That is why any deepening of OPEC cuts while the outbreak is still going on is oil down the drain.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London