In its latest World Economic Outlook, the International Monetary Fund (IMF) said the world is heading into a much worse decline than in the financial crisis of 2008-09, with global GDP shrinking by 3 percent this year on account of the current COVID-19 pandemic.
Perhaps the biggest toll of the pandemic can be felt in the oil sector where demand has fallen to historical lows and prices have slumped so badly that short-term cuts and heavy discounts haven’t provided enough fillip.
A storm of epic proportions is gathering in the oil market where storages are brimming and top producers have only agreed to ceasefire after weeks of pumping oil like it was going out of fashion, while consumers hunker down at home waiting out a dangerous pandemic.
The COVID-19 pandemic is inflicting high and rising human costs worldwide, and the necessary protection measures are severely impacting economic activity.
Oil which is one the biggest enabler of the modern economy has taken a hit. Factories are shut, airplanes have disappeared from the skies and even the roads are quiet.
According to a study by Rystad Energy, a Norwegian, independent energy research and business intelligence company, the largest oil supply surplus the world has ever seen in a single quarter has hit the global market this April, creating an imbalance of around 10 million barrels per day (bpd).
The firm’s research analysis shows that global storage infrastructure is in trouble and will be unable to take more crude and products in just a few months.
However, oil producers have cobbled together an agreement. Their slumping economies created a strong incentive for Russia and Saudi Arabia to do what they failed to do a month ago, and agree concerted cuts in oil production to cushion the blow.
After four days of wrangling, the OPEC+ group finally reached an agreement on Sunday April 12: its members have pledged to cut their production by 9.7 million barrels per day in May and June, 7.7 million b/d for another six months, and then 5.8 million b/d for a further 16 months. It is the largest output cut since OPEC was founded 60 years ago. The US president played a key role in the negotiation, sometimes organizing web conferences among oil producers.
“In a baseline scenario–which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound—the global economy is projected to grow by 5.8 percent in 2021 as economic activity normalizes, helped by policy support.,” said the IMF, in its report.
The IMF said that risks for even more severe outcomes are substantial. “Effective policies are essential to forestall the possibility of worse outcomes, and the necessary measures to reduce contagion and protect lives are an important investment in long-term human and economic health.
“Because the economic fallout is acute in specific sectors, policymakers will need to implement substantial targeted fiscal, monetary, and financial market measures to support affected households and businesses domestically.
“And internationally, strong multilateral cooperation is essential to overcome the effects of the pandemic, including to help financially constrained countries facing twin health and funding shocks, and for channeling aid to countries with weak health care systems.
The IMF described the drop-off in oil demand as “unprecedented”, and highlighted the impact on oil-exporting countries, warning that it would be a particularly severe blow for those with high production costs and undiversified revenues.
