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Scale of oil demand collapse is beyond what industry can handle, says IEA

Highlights

Oil industry has never seen anything like 2020

Entire supply chain is seizing up

Low oil prices will affect clean energy transitions

London — The scale of demand destruction cause by the COVID-19 is "well in excess of the oil industry's capacity to adjust", the International Energy Agency warned Wednesday.

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The IEA in a piece published on its website, said the ferocity of the current crisis has never been matched in the history of the oil market.

"Comparisons with previous periods of disruption in oil markets are inevitable but misplaced. The oil industry has never seen anything like 2020," the agency said.

The coronavirus pandemic has forced most of the world to go into lockdown, dramatically cutting oil demand, and oil prices have fallen by almost 75% since the start of the

year, with some producers losing money on every barrel they produce.

This demand shock has also occurred just as the world's biggest oil suppliers, Russia and Saudi Arabia, backed away from a production agreement and plunged into a battle

for market share. These events have completely transformed the oil markets throwing it off its axis.

Platts Dated Brent, which is the world's most liquid physical benchmark, fell to 19-month low of $17.68/b on March 31, and similar values were heard as of Wednesday

afternoon.

Around 5 million b/d is not fetching high enough prices to cover the costs of getting it out of the ground based on an ICE Brent price of $25/b, according to the IEA.

Last week, Fatih Birol, the Paris-based body's executive director, said oil demand will drop by roughly 20 million b/d to about 80 million b/d this year. With lockdowns

across the world increasing further, demand contraction estimates are likely revised down in the coming weeks.

"As demand plummets, the entire supply chain of oil refining, freight, and storage is starting to seize up, making it increasingly difficult to push new supply into the system," the

IEA said.

Profound impact

The IEA noted that if prices continue to fall there "could soon be no place" for oil to go and oil companies will have to undertake sharp cuts in new investments.

The independent US companies and shale producers are likely to bear the first brunt of this new environment.

"Projects considered low cost yesterday (those that are viable at $35-45/b) already look high cost today, and only the most resilient investments have a chance of going ahead. Companies are pushing back other plans and redesigning them where possible in order to seek ways of driving costs even lower. Otherwise, they are shelving these projects entirely," it added.

IEA stressed that the impact to some oil exporters will be profound bringing risks to their social and financial stability.

The piece singled out OPEC members Iraq and Nigeria saying their ability to continue to pay salaries and provide essential services to their populations, such as healthcare and education will come under pressure.

The refining sector which normally benefits from lower oil prices is not immune from this crisis.

Some refineries face an existential threat as the products that brought them the most lucrative profits like jet fuel, gasoline and diesel are in freefall.

The plunge in demand has squeezed refinery margins and volumes and refiners and some refineries are already mulling a temporary shutdown as their storage capacity reaches its limit.

"With demand now in free fall, the excess capacity now looms very large over the industry, posing an immediate threat to the outlook for older and more exposed operations," it said.

Energy transition prospects

The organization also warned that the present situation will affect the prospects for clean energy transitions easing some aspects while complicating others.

"Although demand for oil will rebound when the crisis eases, the dislocation could accelerate some structural changes in the way the world consumes oil," it said.

The link between oil and gas prices is also set to disappear as international gas suppliers struggle to cover their operating costs.

But it did acknowledge that gas demand is less exposed to the current crisis compared to oil demand because of its relatively limited use for transport.