IEA lowers fourth quarter forecast for oil demand

A second half-year recovery was largely due to China's 'fast rebound' from its earlier lockdown

UBS sees a "moderate production response" from US shale in the second half of the year and a "stronger" one in 2022. Reuters

The International Energy Agency slashed its forecast for oil demand in the fourth quarter of 2020 by 200,000 barrels per day, estimating overall consumption for the year to have averaged 91.2 million bpd.

The Paris-based agency revised down its demand decline for this year by a 100,000 bpd, estimating the overall slump at 8.8m bpd from levels seen last year.

Global demand has picked up from the second quarter of the year, which the IEA previously described as one of the bleakest seen in recent years. Demand had collapsed by 16.4 per cent or 16.3m bpd in the three months to the end of June.

In April, oil prices plunged at the height of the demand crunch, with West Texas Intermediate, the benchmark for US oil, falling to sub-zero levels over storage capacity constraints.

While demand in the second half has recovered largely due to China's "fast rebound" from its earlier lockdown, the fourth quarter will still see a 6.2m bpd decline compared to the same period last year.

Demand in China, the world's second largest economy, is expected to have grown 700,000 bpd in the second half, however, the IEA said the outlook for OECD countries, particularly in Europe looks "bleak".

"Europe appears to be going backwards with demand in 4Q20 lower than in 3Q20 as re-imposed lockdowns take their toll," the agency said in its final monthly market review for the year. France, Germany and the UK have all reverted to lockdowns.

The IEA continues to factor a downgrade to demand for the aviation sector by 300,000 bpd for the first half of 2021, anticipating a "smaller rebound" of 5.7m bpd for the whole year.

Demand forecast for 2021 has also been revised down by 170,000 bpd as the IEA sees flailing demand for jet fuel and kerosene. The fuels will account for around 80 per cent of the overall 3.1m bpd shortfall in consumption next year, compared with 2019.

However, demand for gasoline and diesel could return to 97 to 99 per cent of the levels seen in 2019, the IEA said.

Meanwhile, on the supply side, the agency noted a rise in output by 1.5m bpd in November to 92.7m bpd due to increases in Libya and resumption of production following hurricane shut-ins in the US.

IEA sees higher output, largely from Opec+, as the countries plan to add an additional 500,000 bpd to the markets from January until March 2021.

"Opec+ dominates global growth in the near term, with virtually all the 4Q20 gains and 80 per cent in 1Q21. For 2021 as a whole, non-Opec producers outside Opec+ are expected to increase output by 400,000 bpd after a fall of 1.3m bpd in 2020," the report said.

Oil prices have picked up towards the end of the year, with Brent, the international benchmark testing $50 per barrel levels, which were last seen in March.

The IEA noted the "shallow backwardation" in the futures market, a term denoting higher current prices for a commodity, compared with that expected in the future.

Brent and WTI were trading virtually unchanged from their previous settlement at $50.28 per barrel and $46.98 per barrel at 2.06pm UAE time.