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IEA condemns ‘Russian roulette in oil markets’

Global oil market turmoil caused by a supply war between Saudi Arabia and Russia threatens political stability—just as the world should be coming together to combat Covid-19. So says the IEA, as it launches forecasts for annual growth to 2025.

The IEA today condemned apparent attempts to kill off US shale oil production, warning that collapsing oil prices threaten the stability of some oil-producing countries. The agency was responding to Saudi Arabia’s decision to raise its production following Russia’s refusal to agree to output cuts at last week’s Opec+ talks. 

The impact of the turmoil is heightened by the underlying Covid-19 virus outbreak, which is constricting travel and broader economic activity. It is threatening an “unprecedented overhang” of 3.5mn bl/d of oil supply in the first quarter of 2020, warned executive director Fatih Birol. 

“At a time of such uncertainty and potential vulnerability for the world economy, playing Russian roulette in oil markets may well have grave consequences,” he says. 

With the price of Brent crude having fallen to around $35/bl—following the biggest one-day fall since the Gulf War of the early 1990s—Birol says he was worried about some of the major oil-producing countries, with the situation likely to be more severe than that following the oil price crash of 2014.

The IEA now expects oil demand in its base scenario to fall by 90,000 bl/d in 2020—the first drop since 2009

“There will be huge strains on the financial balance of major producers as the collapse in oil prices brings their revenues down to historic lows,” he says. “In some major producing economies, it will be almost impossible to finance essential areas such as health, public sector employment and education—and we may well see social pressures that challenge the stability of countries such as Iraq, Angola and Nigeria.” 

Birol made his comments as the agency launched its latest market forecast for 2020 and its annual five-year forecast to 2025. 

The IEA now expects oil demand in its base scenario to fall by 90,000bl/d in 2020—the first drop since 2009—which compares with its forecast a month ago of growth of 825,000bl/d, a downgrade of close to 1mn bl/d. That would lead to total demand in 2020 of 99.9mn bl/d. 

But the fall could be much worse. To account for the “extreme uncertainty facing energy markets” the agency has developed two other scenarios. In its ‘low’ case, global measures to contain Covid-19 fail, leading to a demand fall of 730,000bl/d, a downgrade of more than 1.5mn bl/d. In its more optimistic ‘high’ case, demand grows by 480,000bl/d as the virus is quickly contained. 

While the coronavirus outbreak has affected a wide range of energy markets, the impact on oil has been “particularly severe because it is stopping people and goods from moving around, dealing a heavy blow to demand for transport fuels”. This is especially so in China, where the outbreak began and which accounted for 80pc of global oil demand growth in 2019. 

Source: IEA

The IEA’s medium-term outlook forecasts that oil demand will grow by an annual average of close to 1mn bl/d to 2025, when there will be a total increase in annual demand over today of 5.7mn bl/d, with China and India accounting for around half of this growth. Demand is expected to contract in 2020 with a “sharp rebound” next year. 

Global production capacity is forecast to rise by 5.9mn bl/d, with three-quarters of that coming from non-Opec producers. However, output growth loses its momentum in the US and other non-OPEC countries after 2022, “allowing Opec producers from the Middle East to turn the taps back up to keep the market in balance”. 

Birol expressed scepticism that any attempt to kill off US shale oil production would succeed. 

“At these prices we could see a halt to growth because many independent producers are already heavily indebted. But this situation could also lead to consolidation in the near future, which could bring further efficiency gains. The shale industry has proven its resilience again and again.”

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