These are, for sure, bad times for the oil market. Global demand will tumble by 9.46mn bpd this year, the Organisation of the Petroleum Exporting Countries said in a monthly report on Monday. The decline is more than the 9.06mn bpd drop expected a month ago.
Oil prices have collapsed ever since the coronavirus crisis has curtailed travel and economic activity.
Crude has lost almost 15% so far this month; prices slipped below $40 a barrel the previous week for the first time since June.
To tackle the drop in demand, Opec and its allies, known as Opec+, agreed to a record supply cut of 9.7mn bpd that started on May 1, while the US and other nations said they would pump less.
After reviving prices from an unprecedented collapse over the spring, Opec+ is seeing the recovery stall and fuel demand falter as the deadly pandemic surges once again.
Consistently lower oil prices, indeed, is a source of acute financial distress for Opec nations: From poorer members like Nigeria and Venezuela - who need crude prices far above current levels to cover government spending - all the way up to Gulf nations.
The outlook isn’t rosy either.
Fossil fuel consumption is set to shrink for the first time in modern history as climate policies boost renewable energy, while the coronavirus epidemic leaves a lasting impact on energy demand, BP said on Monday.
The share of fossil fuels is set to decline from 85% of total primary energy demand in 2018 to between 20% and 65% by 2050. At the same time, the share of renewables is set to grow from 5% in 2018 to up to 60% by 2050.
In its forecast, BP sees the growth in global economic activity slow “considerably” over the next 30 years from its past 20-year average.
Hedge funds sold crude oil and refined products at the fastest rate for more than two years in the first week of September, as the summer trading lull ended abruptly and bullishness towards oil evaporated.
As a panel of Opec+ ministers meets on Thursday to discuss the market, some delegates have voiced concern about the drop in prices this month. But there are, as yet, no signs the group is planning to tweak the supply cut pact.
And Libya - which is exempt from the output cuts because of a civil war that’s shut down its oil industry - may resume exports soon, according to US officials.
The North African country’s production has slumped to less than 100,000 bpd from 1.1mn at the end of last year.
In theory, Opec’s task should get easier next quarter as demand for winter fuels kicks in and a gradually mending global economy rekindles the need for road and aviation fuels, data from the International Energy Agency in Paris shows.
But as the outlook continues to darken, Opec+ may choose to underscore their readiness to act.
Opec and its allies earlier succeeded in rebalancing the oil market. But here is the big question: Can Opec maintain prices sustainably high as the Covid-19 pandemic continues to weigh on demand?
The world is in need of a stable oil market with price equilibrium.
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