Commodities

IEA sees Covid-19 destroying global oil demand growth

G. CHANDRASHEKHAR | Updated on March 09, 2020 Published on March 09, 2020

Even as the energy markets are collapsing with the rapid spread of the dreaded coronavirus (Covid-19) across countries, global oil demand is set to decline in 2020, the International Energy Agency (IEA) has said in a report published from Paris today.

The IEA sees a deep contraction in oil consumption in China as demand this year drops for the first time since 2009 following major disruptions to global trade and travel. As the world’s largest energy consumer, the Asian major accounted for almost 80 per cent of the global oil demand growth last year.

With the spread of Covid-19 well beyond China, the IEA has cut its base case global oil demand forecast by 1.1 million barrels per day (bpd). In its base case scenario, IEA sees oil demand fall by 90,000 bpd, while in an optimistic high case scenario, oil demand could rise by 480,000 bpd. In the pessimistic low case, where countries facing the virus attack are slow to recover, the damage to oil demand could be as high as 780,000 bpd.

Reduced economic activity, restricted travel and tourism as well as uncertainty about the future trajectory of the epidemic have all combined already to take a toll on the energy markets, with Brent crude plunging below $35 a barrel, a level last seen exactly four years ago.

The crash was accelerated by the collapse of talks among oil producers OPEC plus allies to further reduce output to support prices. The role of speculative capital in exaggerating the price impact is of course known. There is palpable panic in the market as confidence about the revival of economic activity, at least in the short term, is weak.

In other words, uncertainties surrounding both demand side and supply side are seen haunting the market. It is unclear at this point in time, how soon and how effectively the outbreak will be contained. If it is controlled in the next two months or so, it is possible the markets may rebound in the second half of the year. However, if it turns into a pandemic, the world faces the risk of recession.

Surprise windfall

For India, the current market conditions are fortuitous. With import dependence at an alarming 80 per cent of our consumption requirement, a sharp fall in crude prices is a surprise windfall. It has come at a time when the government finances are strained.

But it is critical to recognise that energy markets have always been volatile. It would be foolhardy to feel smug over the current low prices. It can change any time.

The last word on the OPEC+ meeting has not been said as yet. The dialogue is still on as there are no winners among oil producers. Everyone is a loser. This one factor is sure to bring them together to reassess the situation and take consensus action. In the likely event of an agreement to cut output further, the market is sure to rebound from the current low levels. Simply put, do not take the low oil prices for granted.

The writer is a policy commentator and commodities market specialist. Views are personal.

Published on March 09, 2020

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