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OPEC+ 'under pressure' to cut or risk supply glut

Slashes 2020 demand growth to 825,000 b/d, lowest since 2011

Q1 call on OPEC seen 1.7 million b/d below current output

London — Global oil demand will contract for the first time in a decade during the first quarter of 2020, the International Energy Agency said Thursday, as the escalating coronavirus outbreak slams the brakes on China's oil-hungry economy.

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As the death toll from the Covid-19 coronavirus continues to rise sharply in China, the IEA cut its 2020 oil demand growth forecast by 365,000 b/d to 825,000 b/d, the lowest since 2011.

The virus has slashed Chinese energy demand after hundreds of domestic flights were canceled amid severe travel restrictions that will reduce Chinese refining throughputs by 1.1 million b/d during Q1, the IEA said in its latest monthly oil market report. As a result, global oil demand will shrink by 435,000 b/d year on year in Q1, the IEA forecast, the first quarterly contraction since the global financial crisis in late 2009.

Covid-19 is expected to reduce world oil demand by 1.1 million b/d in Q1 and by 345,000 b/d in Q2, the IEA said, slashing its oil demand forecast for 2020 by almost 500,000 b/d. Overall 2020 oil demand is now forecast at 100.97 million b/d, 480,000 b/d below the IEA's previous estimate.

"Before the outbreak of Covid-19, [China] was expected to drive over a third of oil consumption growth in 2020, but now we think it will be less than a fifth," the IEA said.

Oil demand in China, the world's biggest oil importer, is now expected to grow by just 150,00 b/d in 2020, its lowest annual increase since 2008. Global oil demand growth in 2019 was also trimmed by 80,000 b/d to 885,000 b/d, the IEA said, on lower-than-expected consumption in the OECD.

OPEC under pressure

Before the virus outbreak last month, the IEA had already been predicting a major supply surplus in the first half of 2020, driven by rising non-OPEC oil supply. With demand growth now expected to fall sharply due to the outbreak, the demand for OPEC's crude will plunge to 27.2 million b/d in Q1, some 1.7 million b/d below the group's January production of 28.86 million b/d. For the year as a whole, the call on OPEC crude oil is now 28.4 million b/d, down 1.3 million b/d from 2019, the IEA estimates.

"With Covid-19 potentially hitting demand hard in H1 2020, producers are under pressure to make further cuts," the IEA said.

The global oil market is still expected to move toward balance in the second half of 2020, however, as the impact of Covid-19 tails off, oil demand picks up and the pace of non-OPEC supply growth slows. The IEA said it still expects non-OPEC supply growth in 2020 of 2 million b/d, driven mostly by US shale. Despite the $10/b fall in oil prices since the virus outbreak, the IEA said it doesn't expect to see any supply impact from the price-sensitive US shale sector until later in 2020.

The OPEC+ producer group is considering an additional 600,000 b/d of production cuts due to the virus outbreak on top of the 1.7 million b/d already pledged. But Russia is being more cautious over a further cut and has yet to back the proposal.

Even if OPEC+ implement their proposed output cuts in the second quarter, there could still be a sizeable supply overhang of 700,000 b/d for the period, according to Norway-based research group Rystad Energy.

"The production cuts of 600,000 b/d day by an OPEC+ committee are far from enough to balance the market," Rystad said in a note citing its own analysis.

Libyan supply crunch

OPEC's crude output tumbled in January to 28.86 million b/d, the lowest since the global recession of 2009, the IEA estimated, marking the first month of deeper OPEC+ cuts. A port blockade also cut Libyan flows sharply, with January production 360,000 b/d lower than December's at an average 780,000 b/d.

By early February output was only 15% of December's, the IEA estimated, at around just 180,000 b/d.

In its own monthly oil market report on Wednesday, OPEC also sharply cut its oil demand forecast for 2020, citing the virus' toll on China's economy. OPEC shaved 230,000 b/d off its 2020 world oil demand growth forecast.

Potential scenarios for the demand impact from the outbreak in 2020 range from 290,000 b/d to as high as 1 million b/d in the worst case, according to S&P Global Platts Analytics.

On stocks, the IEA said OECD industry inventories held largely steady in December at 2.91 billion barrels as a build in product inventories more than offset lower crude holdings. Total oil stocks stood 26.4 million above the five-year average and covered 61 days of forward demand. It said preliminary data for January show inventories building in the US and Japan but falling in Europe.