Global oil demand suffering as Covid-19 fallout continues

Andrew Cummings
August 14, 2020

Futures in NY were up 0.2%, recovering some of Thursday's 1% drop.

Russian Energy Minister Alexander Novak said on Thursday he did not expect any hasty decisions on output cuts when a monitoring committee of OPEC and its allies, known as OPEC+, meets next week as the oil market has been stable.

Oil prices held largely steady on Thursday after the International Energy Agency lowered its 2020 oil demand forecast following unprecedented travel restrictions and data showing a decline in USA inventories provided some support, Reuters reported.

In its latest report, IEA reduced estimates for nearly every quarter through to the end of 2021, with the second half of this year taking the steepest downgrades.

This came on the heels of the Organization of the Petroleum Exporting Countries (OPEC) stating that world oil demand will fall by 9.06 million bpd this year; but as was the case in previous sessions, the grim analytical predictions were buffered by more good economic news, which on Thursday took the form of Wall Street reportedly recovering most of the trillions lost during the start of the pandemic and the S&P 500 coming close to a record high. Though many, including the IEA, expect the oil market to tighten for the rest of the year, flare ups in the virus are stymieing the resurgence of demand and gasoline production in Europe is now unprofitable. "It reflects a shift of sentiment from recovery toward stalling economic growth".

The IEA said oil demand exceeded supply in June - ordinarily a bullish factor - but uncertainty related to COVID-19 and the possibility of increased output by top producers meant the market's rebalancing would be "delicate".

In a sign of lingering demand weakness, the US average retail price for gasoline could dip back below $2 a gallon in the fourth quarter, especially in the event of a resurgence of Covid-19 cases and the flu, according to auto club AAA. Elsewhere, a company majority-owned by Royal Dutch Shell Plc said it will shut a 110,000 barrel-a-day refinery in the Philippines.

Still, physical markets are showing some strength.

The global crude benchmark's three-month timespread was $1.21 a barrel in contango - when prompt prices are lower than later-dated ones - from $1.03 in contango at the end of the last week. Light Louisiana Sweet crude is trading at $1.80 a barrel over Nymex WTI futures this week, its highest premium in almost three weeks.

The Organization of Petroleum Exporting Countries and its allies delayed the Joint Ministerial Monitoring Committee by a day to August 19 due to Russian Energy Minister Alexander Novak's schedule, according to delegates. Crude production is now just 100,000 to 200,000 barrels a day, the consultant said in a report.

"This week's inventory data was supportive, but the next significant catalyst that the market is focused on could be the U.S. coronavirus stimulus package", Stephen Innes, chief global market strategist at AxiCorp Ltd, said in a note.

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