IEA sees OPEC+ pact helping oil market in H2 after April crunch

London — A global pact to cut production led by OPEC+ may not be enough to rebalance the market in the near-term but could aid a quicker recovery in the second half of 2020, the International Energy Agency said Wednesday.

Global oil demand is expected to fall by a record 9.3 million b/d year on year in 2020, the IEA said, as containment measures in 187 countries bring mobility to a virtual standstill. The worst of the demand collapse will be seen in April, which could see consumption at 1995 levels.

The Paris-based agency forecasts demand dropping by as much 29 million b/d year on year in April followed by a plunge of 26 million b/d in May.

That stacks up against a global production cut agreement that will see the 23-country OPEC+ cut output by 9.7 million b/d from an agreed baseline level starting May 1. This deal is underpinned by support from the G20 energy ministers with further potential initiatives still being worked out.

The IEA said the total non-OPEC output falls could reach 5.2 million b/d in the last quarter of 2020, and for the year as a whole output may be 2.3 million b/d lower than last year.

"There is no feasible agreement that could cut supply by enough to offset such near-term demand losses. However, the past week's achievements are a solid start and have the potential to start to reverse the build-up in stocks as we move into the second half of the year," the agency said.

"By lowering the peak of the supply overhang and flattening the curve of the build-up in stocks, they help a complex system absorb the worst of this crisis," it added.

Upbeat tone

The IEA pointed out that the OPEC+ production cut in May to reach the baseline will actually be 10.7 million b/d and not 9.7 million b/d, as April production will be higher due to the spike in volumes, out of Saudi Arabia in particular, after it started to pump to the maximum.

This will provide some immediate relief from the supply surplus in the coming weeks, lowering the peak of the build-up of stocks, the IEA highlighted.

The agency said four countries, namely China, India, South Korea and the US have either offered their strategic storage capacity to industry to temporarily park unwanted barrels or are considering increasing their strategic stocks to take advantage of lower prices.

While this doesn't take the barrels completely out of the equation, the IEA stressed this "will create extra headroom for the impending stock build-up, helping the market get past the hump."

Meanwhile, the US and Canada could drag the output from other producers down by around 3.5 million b/d in the coming months due to the pain of lower prices, according to IEA estimates.

"If production does fall sharply, some oil goes into strategic stocks, and demand begins to recover. The second half of 2020 will see demand exceed supply," it added, stating its current demand and supply estimates imply a stock draw of 4.7 million b/d in the second half.