Oil fell below $20 a barrel on Wednesday after the International Energy Agency (EIA) said it expects global demand in 2020 to fall by 9.3 million barrels a day, with countries around the world effectively having to shut down in response to the coronavirus pandemic.
In its closely-watched monthly report released on Wednesday, the Paris-based agency said activity in the transportation sector has fallen dramatically almost everywhere, noting that confinement measures had been implemented in 187 countries and territories in response to the coronavirus outbreak.
“Even assuming that travel restrictions are eased in the second half of the year, we expect that global oil demand in 2020 will fall by 9.3 million barrels a day versus 2019, erasing almost a decade of growth,” IEA said on Wednesday.
Oil prices, which were already trading slightly lower Wednesday morning, extended their losses shortly after the report was published.
U.S. West Texas Intermediate (WTI) stood at $19.77, down around 1.7 percent, while International benchmark Brent crude traded at around $28.74 a barrel, down more than 2.8 percent.
WTI futures closed more than 10 percent lower in the previous session, settling marginally above $20 a barrel, while Brent settled almost 7 percent lower on Tuesday, slightly below $30.
Also, Brent, the benchmark for two-thirds of the world’s physical supply, was assessed at $20.66 on Tuesday, compared with $23.73 last Thursday, according to S&P Global Platts.
Oil has lost about two-thirds of its value this year as countries extend their coronavirus lockdowns, death tolls mount around the world, and unemployment explodes in America.
The International Monetary Fund estimated the global economy will shrink 3percen this year, a signal that energy demand may remain weak, while the IEA is warning that the worst may be yet to come.
IEA noted that a global pact to cut production led by Organisation of Petroleum Exporting Countries (OPEC) and allies members may not be enough to rebalance the market in the near-term but could aid a quicker recovery in the second half of 2020.
IEA said demand in April is estimated to be 29 million barrels per day lower than a year ago, hitting a level last seen in 1995 while in the second quarter of the year, oil demand is expected to be 23.1 million barrels per day below year-ago levels.
While recovery is forecast to be underway in the second half of the year, the IEA said it expects this to be gradual and, in December, demand will still be down 2.7 million barrels per day year-on-year.
The IEA said the total non-OPEC output falls could reach 5.2 million b/d in the last quarter of 2020, and for the year as a whole output may be 2.3 million b/d lower than last year.
“There is no feasible agreement that could cut supply by enough to offset such near-term demand losses.
However, the past week’s achievements are a solid start and have the potential to start to reverse the build-up in stocks as we move into the second half of the year,” the agency said.
“By lowering the peak of the supply overhang and flattening the curve of the build-up in stocks, they help a complex system absorb the worst of this crisis,” it added.
The IEA said the OPEC+ production cut in May to reach the baseline will actually be 10.7 million bpd and not 9.7 million bpd, as April production will be higher due to the spike in volumes, out of Saudi Arabia in particular, after it started to pump to the maximum.
This will provide some immediate relief from the supply surplus in the coming weeks, lowering the peak of the build-up of stocks, the IEA highlighted.
The agency said four countries – China, India, South Korea and the US – have either offered their strategic storage capacity to industry to temporarily park unwanted barrels or are considering increasing their strategic stocks to take advantage of lower prices.
While this doesn’t take the barrels completely out of the equation, the IEA stressed this “will create extra headroom for the impending stock build-up, helping the market get past the hump”.
Meanwhile, the US and Canada could drag the output from other producers down by around 3.5 million b/d in the coming months due to the pain of lower prices, according to IEA estimates.