The International Energy Agency (IEA) said on Thursday that market forces had “demonstrated their power” on the supply side of the oil market in recent weeks, but concerns remain over the potential for a second wave of Covid-19 infections.
International benchmark Brent crude traded at $29.72 a barrel on Thursday morning, up around 1.8%, while U.S. West Texas Intermediate stood at $25.84, more than 2% higher.
It comes after what the IEA Executive Director Fatih Birol described as “Black April,” when the price of U.S. crude futures tumbled to around negative $40 a barrel.
Since then, the outlook has somewhat improved in energy markets and oil prices have rebounded from their April lows.
“Oil production is reacting in a big way to market forces and economic activity is beginning a gradual-but-fragile recovery,” the IEA said. “However, major uncertainties remain.”
“The biggest is whether governments can ease the lockdown measures without sparking a resurgence of Covid-19 outbreaks,” the Paris-based energy agency added.
Another risk, the group said, was whether oil producers OPEC and its non-OPEC allies, sometimes referred to as OPEC+, would achieve a high level of compliance with its agreed output cuts.
“These are big questions — and the answers we get in the coming weeks will have major consequences for the oil market,” the IEA said.
Demand forecast
In its closely-watched monthly report, the IEA’s outlook for oil demand showed a fall of 8.6 million barrels per day (b/d) to 91.2 million b/d this year. That’s 0.7 million b/d more than the group anticipated in its previous report.
This projected fall of oil consumption would be the biggest demand drop in history, the IEA said.
On the supply side, it expected a “spectacular” fall of 12 million b/d this month, falling to a nine-year low of 88 million b/d.
It comes after OPEC+ agreed to curb production by a record 9.7 million b/d in May and June. OPEC kingpin Saudi Arabia has since said it plans to cut output by an additional 1 million b/d to 7.5 million b/d in June.
“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 IEA said.
“We are seeing massive cuts in output from countries outside the OPEC+ agreement and faster than expected,” it added.
The IEA said output cuts from countries outside the OPEC+ agreement, such as the U.S. and Canada, meant output was 3 million b/d lower in April than at the start of the year. The group said it could be 4 million b/d lower in June, “with perhaps more to come.”
Global confinement measures to fall from a recent peak
A global public health crisis has meant countries across the globe have effectively had to shut down, with many governments imposing draconian restrictions on the daily lives of billions of people.
The restrictions, which have created an unprecedented demand shock in energy markets, are expected to result in the worst economic downturn since the Great Depression in the 1930s.
To date, more than 4.3 million people have contracted the coronavirus, with 297,226 deaths worldwide, according to data compiled by Johns Hopkins University.
Some countries have sought to slowly ease lockdown measures, allowing some shops and factories to reopen.
The IEA said the gradual relaxation of restrictions was helping demand in energy markets. It estimated that the number of people living under some form of confinement measures at the end of May would drop to 2.8 billion worldwide, down from a recent peak of 4 billion.
However, the group stressed a resurgence of Covid-19 cases would constitute a “major risk factor” to oil demand.
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