Opec cuts oil demand as market faces ‘historic shock’
dubai — Opec on Thursday predicted a “historical drop” of around 6.9 million bpd in average daily demand for 2020 and said the oil market is undergoing a historic shock that is abrupt, extreme and at a global scale.
The group in its latest monthly report said downward risks remain significant, suggesting the possibility of further adjustments, especially in the second quarter as a result of the shock delivered by the coronavirus outbreak, and warned the reduction may not be the last.
Last month, Opec expected a small increase in demand of 60,000 bpd. Oil has collapsed in 2020 due to the slide in demand. To try to shore up the market, Opec, Russia and other producing nations reached an accord for a record supply cut of 9.7 million bpd.
Per the historic accord, Saudi Arabia will slash output by 2.508 million bpd to million bpd, the UAE by 0.772 million bpd to 3.16 million bpd and Iraq by 0.1061 million bpd to 4.653 million bpd, while the combined Opec cut will be by 6.085 million bpd and the total Opec+ cut will be 9.7 million bpd to a level of 43.85 million bpd.
Opec expects the drop in demand this month to be the largest, seeing a contraction of 20 million bpd. Crude was trading just above $28 a barrel after the release of the Opec report, paring an earlier gain.
Even so, Opec expects a smaller near-term impact on demand than the International Energy Agency, which on Wednesday forecast a 29 million bpd dive in April oil demand to levels not seen in 25 years and 9.3 mbd drop in demand for 2020.
“There is no feasible agreement that could cut supply by enough to offset such near-term demand losses. April could prove the worst month ever for the industry as production is set to increase while demand tumbles amid economic lockdowns around the world,” IEA executive director Fatih Birol said.
Ehsan Khoman, head of Mena Research and Strategy, MUFG, said large-scale stock-builds are rising, testing storage capacity limits and inevitably forcing production shut-ins.
“While the Opec+ production cuts have materially lessened the risk of storage being filled significantly and offering a smoother route to working off inventories, we still believe that storage will test capacity limits, requiring 3-4 mbd of production shut-ins even before phase one of Opec+ 9.7mbd of cuts is expected to commence on 1 May,” said Khoman.
The MUFG analyst said in the face of unprecedented demand weakness, the Opec+ supply cuts are not anywhere near enough to prevent stock-builds, the scale of which are likely to test the limits of storage capacity, forcing prices lower. “As a result, our expectations are for Brent to fall to near cash-costs levels of $20/b with WTI testing below $10/b, over the coming weeks.”
“The massive storage build, as counterintuitive as it sounds, did provide some price support as the build foreshadows that more wellhead closures are just around the corner, which effectively trims US supply,” said Stephen Innes, chief global markets strategist at AxiCorp.
Some countries have also committed to increasing purchases of oil for their strategic stockpiles, but there are limits to how much oil can be bought and the extent of global coordination.
Speaking of US strategic reserve buying, Commerzbank analysts said that “this would accommodate 23 million barrels, which would normally constitute a massive additional reserve but these days would only just be enough to cope with one weekly increase in stocks.”