OPEC Anticipates Fall in Demand for Oil- Supply Chain to Match Tune?

Crude oil prices are now gaining momentum with prices of Brent crude oil futures (CFD) recovering from the level of USD 15.98 (intraday low on 22 April 2020) to the level of USD 32.91 (intraday high on 15 May 2020), which underpin a price appreciation of ~105.94 per cent.

In the status quo, the OPEC+ are planning to extend the production cut beyond the pre-decisive deadline of June 2020, when Saudi and OPEC+ decided to take the production cut to 9.7 million barrels per day in order to balance the supply chain with the global demand, which has plunged by 30 per cent or 30 million barrels per against the pre-crisis level at present.

OPEC+ which initially decided to gradually increase the production cut after maintaining an overall production cut of 10 million barrels per day after June 2020, is now looking for maintaining the production cut beyond June 2020 to support the oil price, which in the recent past had tumbled beyond zero to trade under negative territory (WTI futures).

However, while the production cut or the supply chain is at the one side of the equation, the energy market is now keeping an astute eye over the demand counter, which though is anticipated to improve over the short-term as travel restrictions across the globe ease, but could take a hit over the long-run, which could be inferred by the recent demand forecast by the OPEC.

OPEC Slashes Oil Demand Forecast

OPEC assesses that the global demand in 2019 remained largely unchanged to stand at 99.67 million barrels per day for the year, with oil demand from OECD declining by 0.10 million barrels per day amid a large drop in OECD Asia Pacific oil requirements and weaker than expected oil demand growth in OECD Americas and Europe, while non-OECD demand increasing by 0.93 million barrels per day in the wake of solid demand for petroleum products in both China and other Asia.

However, OPEC now anticipates that the oil demand in 2020 would plunge by 9.07 million barrels per day, which is down by 2.23 million barrels per day against its previous forecast to stand at 91.10 million barrels per day.

OPEC further suggested that the lower demand outlook is largely due to the impact of COVID-19 pandemic, which has caused an economic recession and eroded oil demand growth in many countries across the globe.

While the global oil demand has been reduced considerably due to reduced air travel activities, impacting gasoline and jet fuel demand growth in 2Q20 and for 2020 as a whole, OPEC anticipates that the demand for industrial fuels would also take a hit ahead amid reduced manufacturing activity compared to last year, which would impact the demand for diesel and residual fuel.

OPEC also projects the demand for oil across the OECD region would drop by 5.19 million barrels per year on a y-o-y basis, which marks a revision of 1.20 million barrels per day against the previous forecast.

In the non-OECD region, oil demand is projected to decline by 5.19 million barrels per day on a y-o-y basis, which marks a revision of 1.03 million barrels per day against the previous forecast.

World oil demand in 2020 in million barrels per day (Source: OPEC Monthly Report)

Oil Supply To Match the Tune

OPEC revised the estimation of non-OPEC liquids production growth by 0.04 million barrels per day to stand at 2.02 million barrels per day in 2019.

On the supply counter, OPEC predicts that the non-OPEC liquids production would decline by 3.5 million barrels per day to stand at 61.50 million barrels per day, which marks a down revision of 2.0 million barrels per day against the previous forecast.

Also Read: Crude Soars on Slightest Indication of Demand; Oil is not out of the Woods yet

The down revision by OPEC is largely based on production curtailment plans announced by various companies across the globe, including some majors, especially from North America.

While the United States is now seeming to be participating the production cut to support domestic companies, OPEC revised the U.S. supply by 1.3 million barrels per day to show a decline of 1.4 million barrels per day on a y-o-y basis.

To Know More, Do Read: The Oil Scale Back - A Bedrock for Balancing Demand and Supply Dynamics?

Non-OPEC liquids production forecast comparison (Source: OPEC Monthly Report)

The United States Participation in the Production Cut

In the status quo, the United States curtailed the domestic production from its previous peak of 13.0 million barrels per day to the present level of 11.60 million barrels per day (for the week ended 8 May 2020).

While the domestic oil production across the United States is declining, the overall import has picked up a slight momentum, suggesting that the demand for OPEC crude across the nation is now recovering, which in turn, is supporting crude oil prices across the global front.

In a nutshell, while the OPEC estimates the global demand to take a hit, it also anticipates the supply chain to adjust with the combined efforts from OPEC and the United States, which is supporting the oil market. Apart from that, OPEC+ members are now urging to extend the production cut beyond the previous deadline of June 2020, which once achieved, could somewhat offset the impact of muted demand.

While the oil market is under a seesaw moment, investors are turning their attention towards oil stocks in the market, as the sector and the related-stocks were among the hardest hit from the COVID-19 outbreak.

To Know More, Do Read: Oil Crisis: Should you Buy or Sell Some Oil Stocks?

In the status quo, the impact of a material decline in the international oil market could be seen on the domestic gas market as well, with gas prices also declining over the muted industrial demand and falling oil and gas prices across the globe.

To Know More, Do Read: Wholesale Gas Prices Under Storm- Lens over Demand and Supply