IEA sees tentative signs of faster oil market rebalancing

London — The oil market may start to rebalance quicker than originally anticipated, with the International Energy Agency Thursday pointing to deeper crude production cuts from OPEC+, US output falling faster than expected and modest signs of improving demand.

The Paris-based agency revised up its oil demand decline forecast to 8.6 million b/d compared with a fall of 9.3 million b/d last month, as a gradual easing of COVID-19 related restrictions on mobility help consumption. However, the IEA warned any recovery will be dependent on whether governments can ease the lockdown measures without reviving coronavirus outbreaks.

The IEA report highlighted the role of market forces in prompting production cuts due to the collapse in demand and prices, forcing producers led by the US and Canada to shut in supply more than envisaged. It estimated non-OPEC output by April had fallen by more than 3 million b/d since the start of the year and could reach 4 million b/d in June with potentially more to come.

"It is on the supply side where market forces have demonstrated their power and shown that the pain of lower prices affects all producers," the agency said, noting that by year-end the US will be "the biggest contributor to global supply reductions compared with a year ago."

Shale patch

Indeed, activity in the US shale patch has dropped to record lows and nearly all operators have shut in uneconomic production. The IEA estimated crude oil output fell by as much as 630,000 b/d in April and sees a further 1.2 million b/d decline in May. The agency predicts total US oil supply to drop by 2.8 million b/d by year-end and 1.1 million b/d on average for 2020 compared with 2019, led by weakness in the Permian, the heart of the US shale industry.

With the OPEC+ production cuts having come into effect on May 1, the IEA sees global supply in May down by an unprecedented 12 million b/d, month on month. And here there is more to come should compliance to the deal remain strong, since Saudi Arabia announced that it will reinforce the agreement by voluntarily cutting production by 1 million b/d more than its quota in June. Saudi output would then fall to 7.492 mb/d, the lowest since early 2002 after a record 11.9 million b/d in April. The UAE and Kuwait have followed suit with extra cuts of their own.

The IEA estimated OPEC crude output in April at 30.73 million b/d, up more than 2 million b/d on the month and 1 mb/d higher than in April 2019. By contrast, non-OPEC oil supply was down 1.1 million b/d year-on-year, it noted. Countries that ramped up output in April found an outlet in China, which loaded more than 11 million b/d of crude, based on vessel loadings – a record amount. Iraq, Saudi Arabia, Russia and Brazil all shipped at-or-near their highest ever.