Just How Big Is the Biggest-Ever Slump in World Oil Demand?

How low can you go? That seems to be the question bothering the world’s big-three oil forecasting agencies as they grapple to come to terms with the size of the slump in oil consumption triggered by the international response to the Covid-19 virus.

The International Energy Agency, the Organization of Petroleum Exporting Countries and the U.S. Energy Information Administration have all updated their oil market forecasts in the past week and they make grim reading. As recently as February, all three saw the world’s thirst for oil increasing by close to 1 million barrels a day this year. Now they are projecting a drop in annual average demand of anywhere between 5 million barrels a day and more than 9 million.

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The IEA is the most bearish of the three agencies by some margin. Having been the least optimistic of the three about the strength of growth earlier in the year, it’s now way out in front of the others in its estimation of the demand destruction caused by the grounding of planes, parking of cars and suspension of large parts of the economies in much of the world.

On an annual average basis, the Paris-based IEA now expects global oil demand to be 9.3 million barrels a day lower this year than it was last year. That’s equivalent to losing the entire consumption of India and the whole of Africa. OPEC is a little less gloomy, seeing demand falling year-on-year by 6.85 million barrels a day, while the EIA looks positively optimistic, with its drop of 5.25 million barrels.

But if you think the annual average figures are bad, the quarterly ones are truly horrifying.

The IEA sees a loss of oil demand in the current quarter that’s equivalent to the entire consumption of the U.S. and Canada, or about 23 million barrels a day. The EIA and OPEC are not quite so gloomy, but even they see a drop greater than all the oil used in France, Germany, Italy, Spain, the U.K. and Japan.

All three expect things to get better, or at least not to be quite so bad, in the second half of the year. By then the IEA and OPEC agree that global oil demand will (only) be down by about 5 million barrels a day compared with the same period last year. OPEC and the IEA have very similar views on oil demand in the second half of 2020, while the EIA is noticeably more optimistic. That optimism may reflect the views of an administration that seems determined to ease the lockdown on its citizens as soon as possible.

In the face of these demand forecasts, it’s little surprise that the OPEC group of countries agreed their biggest-ever output cut and managed to bring almost all of their OPEC+ allies along with them. It’s also clear that the cuts by themselves are not nearly big enough to offset the immediate slump in demand.

If the OPEC members adhere strictly to their part of thedeal — which is itself a tall order — the group will pump about 23.4 million barrels a day in May and June, assuming the three members exempt from the cuts — Iran, Libya and Venezuela — continue pumping at last month’s levels. That’s down from a possible 31.8 million barrels a day in April, if Saudi Arabia, Kuwait and the U.A.E. all boost output as they have threatened until the cuts come into effect. That would give an average second-quarter production level of 26.2 million barrels a day.

Comparing that production level with the three agencies’ assessments of the world’s need for OPEC crude in the second quarter reveals the alarming size of the potential stockbuild. OPEC’s own supply demand forecast suggests that stockpiles will build at an average rate of 6.5 million barrels a day this quarter, while the EIA sees them filling at a daily rate of 8.6 million barrels.

But the IEA sees the world needing just 8.5 million barrels a day of crude from OPEC in the second quarter. That would be equivalent to Saudi Arabia pumping in line with its agreed target in April as well as for May and June and none of the group’s other members pumping anything at all.

Assuming the deal is implemented in full from May 1, the IEA’s numbers imply global stockpiles building at an average rate of 17.7 million barrels a day during the whole of the second quarter. That would require 1.6 billion barrels of storage space for crude by the end of June.

On the basis of those figures, even with the full OPEC+ cuts and the loss of an additional 4.5 million barrels a day of non-OPEC supply, oil prices will still have to fall far enough to persuade more producers to shut in more production before we run out of places to store all the crude that nobody wants.

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