High coronavirus case numbers in several major economies will blunt the recovery of an oil market already beleaguered by low demand, the International Energy Agency said Thursday.
In its monthly oil market report, the IEA forecast a sharper contraction in global demand for 2020 for the first time in several months. The agency expects global demand to contract by 8.1 million barrels this year, 140,000 barrels more than in last month’s report.
That increase follows a similar move Wednesday by the Organization of the Petroleum Exporting Countries.
The IEA said that the downgrade reflected the stalling recovery in transport activity and stubbornly high Covid-19 infection rates. Aviation activity was down by two-thirds last month from its normal July levels, while “the virus continues to impact road transport as people avoid nonessential trips and working from home remains the norm in much of the West,” the Paris-based organization added.
Oil prices slipped early Thursday, after receiving a boost Wednesday from a drop in U.S. crude inventories. Brent crude oil, the global benchmark, was down 0.5% at $45.18 a barrel and West Texas Intermediate futures, the U.S. benchmark, was 0.6% lower at $42.42 a barrel.
Crude prices have traded within a narrow range in recent months, with investors having to contend with declining inventories and recovering economic activity on the one hand, and rising coronavirus cases and localized lockdowns on the other.
Nevertheless, prices have increased significantly since what IEA Executive Director Fatih Birol referred to as “Black April,” when futures plunged into negative territory. The agency said that global demand in June exceeded supply and that will remain the case for the rest of 2020.
Still, the recovery appears to be at risk of stalling given increases in supply.
Global supply increased by 2.5 million barrels a day in July, with Saudi Arabia ending its voluntary additional cuts. In addition, U.S. and Canadian production are starting to rise again, the report said. At the same time, the nations of the OPEC+ alliance agreed last month to soften production cuts starting Aug. 1, putting an extra two million barrels a day into the market.
A pump jack sits idle at sunset in Falls City, Texas.
Photo: Eric Gay/Associated PressOverall, the energy sector continues its slow recovery from the huge hit it received from the first waves of the pandemic. The IEA forecasts a 5.2 million-barrel-a-day rebound in demand next year, trimmed slightly from last month’s estimate. Stocks being held in expensive floating storage—a last resort when immediate selling became unprofitable in March and April—fell 19% in July from an all-time high of 184.8 million barrels in June.
Refiners are among those still operating in the “long shadow” the pandemic has cast over oil demand, the report said. While refining activity is recovering, the pace of that will depend on a rebound in demand for refined products, with inventories still very high. Rising oil prices have also squeezed refiners’ profits.
Despite recent improvement, refinery runs—the amount of oil refineries process—are expected to decline by 6.9 million barrels a day, with a tepid rebound next year expected to keep runs below 2018’s historical peak, the IEA added.
Write to David Hodari at David.Hodari@dowjones.com
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