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MEOG CommentaRy MEOG
OPEC report makes for sobering reading
oPeC
OPEC’S Monthly Report for April makes for very sobering reading. It follows the past month’s unprecedented turmoil in the oil market and highlights how major an event this has been, and most crucially, how challenging the year ahead will be.
The report confirmed the already known collapse in crude oil prices in March 2020, when they recorded their deepest monthly drop since the global financial crisis in 2008. The main driv- ing force of this was the coronavirus (COVID- 19) pandemic which resulted in unprecedented worldwide oil demand shock and massive sell- offs in the global oil markets amid a significant crude surplus.
The OPEC Reference Basket (ORB) value was down by $21.61, or 38.9%, on the previous month, to stand at $33.92 per barrel (pb), its lowest monthly value since September 2003. ICE Brent declined by $21.75, or 39.2%, to aver- age $33.73 pb, while NYMEX WTI fell $20.09, or 39.8%, to average $30.45. The term structure of all three crude benchmarks – ICE Brent, NYMEX WTI and DME Oman – moved to a super contango in March, and money managers cut speculative net long positions.
Looking to the future, OPEC now expects global demand for oil to contract by 6.9mn barrels per day, or 6.9%, in 2020, it said in its monthly report for April. Last month, OPEC predicted a small increase in demand of 60,000 bpd. The supporting detail for this includes:
Worldwide recession
This is based on a forecast recession in the world economy in 2020, declining by 1.5%, following global economic growth of 2.9% in the previ- ous year. Following signs of improvement at the beginning of the year, expectations for global economic growth were quickly burdened by the strong impact of the COVID-19 pandemic. Within the OECD, the US is forecast to contract by 4.1% in 2020, following growth of 2.3% in 2019.
An even larger decline is anticipated in the Euro-zone, where economic activity is forecast to fall by 6.0% in 2020, compared with growth of 1.2% in 2019. Japan is predicted to contract by 3.9% in 2020, against growth of 0.7% in 2019. China’s 2020 GDP is forecast to grow by 1.5%, recovering from a sharp contraction in 1Q20 and following growth of 6.1% in 2019. India is forecast to grow by only 2.0%, a sharp slowdown
from already weakening growth of 5.3% in 2019. Brazil’s economy is forecast to contract by 2.4% in 2020, following growth of 1.0% in 2019. Rus- sia’s economy is forecast to contract by 0.5% in 2020, after growth of 1.4% in 2019, not only owing to COVID-19 but also because of the con- siderable decline in oil prices. As risk remains to be skewed to the downside, further revisions may be warranted going forward.
oil demand and supply
World oil demand growth forecast for 2019 is kept unchanged at 0.83mn bpd compared with the previous month’s assessment. For 2020, the world oil demand growth forecast is revised lower by 6.9mn bpd, to a historical drop of around 6.8mn bpd.
The contraction in the 2Q of this year is expected to be around 12mn bpd, with April witnessing the worst contraction at about 20mn bpd. The impact of the COVID-19 outbreak in China in 1Q20, and its negative impact on trans- portation and industrial fuels in the country, has now spread globally and is affecting oil demand growth in most other countries and regions, with an unprecedented impact on global oil demand, transportation fuels in particular.
As a result, OECD oil demand is revised lower by 3.7mn bpd to decline by 4.0mn bpd, while non-OECD oil demand growth is adjusted lower by 3.2mn bpd to contract by 2.9mn bpd for the year. Considering latest developments, and the large uncertainties going forward, downward risks remain significant, suggesting the possibil- ity of further adjustments, especially in the Q2, should new data and further developments war- rant revisions.
Non-OPEC oil supply growth in 2019 is revised down by 0.01mn bpd from the previ- ous month’s assessment and is now estimated at 1.98mn bpd. For 2020, non-OPEC oil supply is forecast to decline by 1.50mn bpd, a down- ward revision of 3.26mn bpd from the previous projection. The impact of COVID-19, ensu- ing global economic recession and oil demand shock, will also lead to supply disruptions.
The benchmark oil price plunge prompted companies to respond by cutting capital expend- iture to its lowest in 13 years. The 2020 oil supply growth forecast for the US was revised down by 1.05mn bpd to show a decline of 0.15mn bpd year on year. The supply growth for the 10 non- OPEC countries participating in the Declaration
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w w w . N E W S B A S E . c o m Week 16 22•April•2020