More economic shock looms as oil demand forecasts trend south

Two forecasts for oil demand by respected energy sector stakeholders point to a bleak future for the sector and even worse economic outlook for countries like Nigeria that rely on crude oil to fund their budgets.

The International Energy Agency (IEA) on Thursday cut its 2020 oil demand forecast, on account of reduced air travel which would lower oil demand to 8.1 million barrels per day (bpd).

This comes just a day after the Organisation of Petroleum Exporting Countries (OPEC) cut demand by 9.1 million barrels per day in 2020 in comparison to the previous year.

The underlying reasons for these bleak forecasts are the expected fallouts from the coronavirus pandemic. In Asia it has led to the closure of factories; in Western countries it has prompted large scale cancellation of travel plans, and in developing countries lower economic activities have crimped demand.

The Paris-based IEA slashed its 2020 outlook by 140,000 bpd to 91.9 million bpd, its first downgrade in several months, on account of limited travels due to COVID-19.

“Jet fuel demand remains the major source of weakness,” the IEA said in its monthly report.

“In April the number of aviation kilometres travelled was nearly 80% down on last year and in July the deficit was still 67% … The aviation and road transport sectors, both essential components of oil consumption, are continuing to struggle,” the report said.

Oil production was recovering in the United States, Canada, and Brazil at the same time producers from OPEC and allies such as Russia, a group dubbed OPEC+, were easing their output cuts, the IEA said.

“However, if countries that have not hitherto complied with their quotas cut back by enough to bring them into compliance, global oil supply would not necessarily increase significantly,” the IEA added.

In its closely-watched Monthly Oil Market Report (MOMR) published on Wednesday, OPEC now forecasts that the global economy will shrink by 4.0 percent this year, more than the 3.7-percent economic drop expected in the July forecast, due to the additional negative impact of the pandemic.

Due to lower economic activity levels in some major developing countries, this year’s global oil demand is now forecast to reach 90.6 million bpd—a drop of 9.1 million bpd compared to 2019. The expected decline in demand is around 100,000 bpd larger than OPEC had forecast last month.

In 2021, global oil demand is set to grow by 7.0 million bpd, with the expected rise unchanged from last month’s projection.

The IEA said that while supply exceeded demand in June, uncertainty over future demand along with increased output by top producers means re-balancing oil markets will be “delicate”.

“The forecast assumes that COVID-19 will largely be contained globally, with no further major disruptions to the global economy,” OPEC noted in its report.

The cartel noted, however, that for 2021 “Large uncertainties prevail, possibly resulting in a negative impact on petroleum consumption going forward. During exceptional times the normal relationship between disposable income and oil demand does not hold up.”

Data cited by the IEA indicated that mobility in many regions had reached a plateau but was increasing in Europe, though a rise in COVID-19 cases caused the agency to cut demand estimates for gasoline.

For oil-dependent economies, this brings added pressure to diversify their supply and look to add value to oil to become competitive.