Potential impact of second wave of COVID-19 on oil industry

Potential impact of second wave of COVID-19 on oil industry
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The potential impact of a second wave of COVID-19 on oil industry remains a concern for the International Energy Agency (IEA).

According to IEA on Thursday, market forces already “demonstrated their power” on the supply side of the oil market throughout the coronavirus pandemic. However, officials are also concerned about the potential resurgence of coronavirus infections.

International benchmark Brent crude reached $29.72 a barrel. This is an increase of 1.8%, while U.S. West Texas Intermediate remained at $25.84, over 2% higher.

The figures came during what the IEA Executive Director Fatih Birol described as “Black April.” This refers to the period when US crude futures prices plunge around negative $40 a barrel.

The forecast appeared to have improved in energy markets while oil prices recovered from their April lows.

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“Oil production is reacting in a big way to market forces and economic activity is beginning a gradual-but-fragile recovery,” the IEA said. “However, major uncertainties remain.”

“The biggest is whether governments can ease the lockdown measures without sparking a resurgence of Covid-19 outbreaks,” the Paris-based energy agency added.

However, the group emphasized the risk of whether oil producers OPEC and its non-OPEC allies, or OPEC+, could observe a high level of compliance with its agreed output cuts.

“These are big questions — and the answers we get in the coming weeks will have major consequences for the oil market,” the IEA said.

Oil demand

The IEA’s forcast for oil demand declined by 8.6 million barrels per day (b/d) to 91.2 million b/d this year. That is equivalent to 0.7 million b/d more than the group expected in its previous analysis.

This estimated fall of oil consumption could be the largest demand drop in history, the IEA said.

On the other hand, supply expected a “spectacular” fall of 12 million b/d this month, going to a nine-year low of 88 million b/d.

“The world has never come to a halt like it has in the past few weeks,” said Francisco Blanch, global head of commodities at Bank of America.

“60% of oil demand comes from transportation. Gasoline sales are down more than 50%. Flights around the world are down 80 or 90%. The collapse in consumption is mobility driven. That’s what makes this crisis different than the great Depression,” he said.

Blanch pointed out that the coronavirus lockdowns make it hard for the typical market mechanism of consumers stepping in when prices fall work. “Producers are now being sent the harshest signal ever to react to the crisis,” said Blanch.

Dan Yergin, vice chairman of IHS Markit, stressed there were two other times when WTI oil futures fell amid lack of places to store it.

“You ran out of storage and prices fell. The difference was in 1986 and 1998, demand was going up. This is with this demand collapse. We’re on a planet we’ve never been on before.. This will end and demand will come back. A lot of it is up to public policy and a lot of it is up to the virus itself,” says Yergin.

Oversupply

Several months ago, the US was producing more oil than any other country, outshining both Russia and Saudi Arabia.

Due to the coronavirus outbreak in China, a steep drop in demand took place. “The oil industry didn’t stop pumping, and the world became more oversupplied with oil,” Patti Domm writes on CNBC.

Energy Secretary Dan Brouillette told CNBC that oil prices are likely at a bottom as the world grapples with the coronavirus pandemic.

He pointed out that the historic agreement signed by OPEC and its oil-producing allies to reduce production has worked to “stem the tide, stem the damage that was being done to the market,” since the onset of the coronavirus pandemic and the Saudi Arabia-Russia oil price war.

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