The International Energy Agency (IEA) on Thursday projected that the much-needed oil recovery could be threatened by two major uncertainties; a possible second wave of COVID-19 infections and potentially underwhelming OPEC+ compliance with the cuts.
This was contained in IEA’s Oil Market Report for May. The IEA noted that despite pledges both for deeper cuts and over-compliance from OPEC’s Middle East heavyweights Saudi Arabia, the United Arab Emirates (UAE), and Kuwait, it is highly uncertain how compliant the whole OPEC+ group would remain with the production reductions. One of the biggest questions that the oil market faces is whether the OPEC+ participants could achieve and then keep the cuts, the IEA said.
An even bigger headache for the oil market rebalancing and oil price recovery is the major uncertainty if coronavirus infections will start rising again in a second wave, after economies have started to re-open and lockdowns are being eased, including in some of the worst-hit countries in Europe such as Italy and the United Kingdom.
“These are big questions – and the answers we get in the coming weeks will have major consequences for the oil market,” the Paris-based agency said.
These uncertainties, if realized, could put at risk the IEA’s slightly more optimistic view on the global oil market this month compared to last month. In the May report, the IEA expects global oil demand to drop by 8.6 million BPD in 2020—a major demand loss this year, but slightly less than the 9.3-million-BPD demand destruction the agency had predicted in its report in April.
For Q2 2020 alone, the IEA expects demand to plunge by 19.9 million BPD compared to last year’s consumption levels.
“A resurgence of Covid-19 is a major risk factor for demand,” the IEA warned.
