See Further Downward Pressure On Oil Prices This Month: IEA’s Fatih Birol

The plunge in crude oil prices continues, with the West Texas Intermediate contract trading below $12 a barrel on Monday. That’s a discount of almost 11 percent a barrel to the June contract.

This is not surprising considering the current supply glut as demand in April will show a decline of 30 percent, as per the International Energy Agency’s latest forecast. Executive Director Fatih Birol described it as “Black April” and, in an interview to BloombergQuint on April 17, said he expects “further downward pressure” on prices this month. At that time the WTI contract was already trading at around $18 per barrel.

Even as the world battles a pandemic and its unprecedented impact, the oil industry has witnessed its own drama. A price war, that was first prompted by differences between Saudi Arabia and Russia, has since been compounded by the global economic crisis brought on by the Covid-19 pandemic and the many lockdowns imposed due to it across the world.

Last week, a deal was struck between the world’s largest oil producers to cut production. OPEC+ group decided to cut production by 9.7 million barrels a day, starting May 1. That is expected to cut global oil supply by a record 12 million barrels a day in May, says the IEA.

Other producers, with the U.S. and Canada likely to be the largest contributors, could see output fall by around 3.5 million barrels a day in the coming months due to the impact of lower prices, according to the report.

Also, four countries—China, India, Korea and the U.S.—have either offered their strategic storage capacity to temporarily park unwanted barrels or are considering increasing their strategic stocks to take advantage of lower prices, the IEA said.

Yet, it’s not clear if this production discipline will be sufficient to help prices recover, and will be maintained over the medium term.

In this interview, Fatih Birol discusses the politics and economics of oil, where prices are headed and the worst case scenario.

Edited excerpts.

You called April a “Black April”. What is the IEA forecast for the next few months and for 2020.

Now I call this month as ‘Black April’. The reason is that we expect this month global oil demand to decline about 30 million barrels per day-- about a 30 percent decline and this is huge. And throughout this year (2020), we expect global oil demand will decline, more than 9 million barrels per day. To put this in a context you just mentioned the IMF. The IMF said the day before our report that the global economy will decline 3 percent this year. This would mean that global economic growth of one year is going to be erased because 2019 last year, global economy increased 2.9 percent and this year it is expected to decline 3 percent. So it's going to erase that this year.

So there is a big disproportionate impact of this coronavirus on the oil industry. As such, this year is very difficult and this quarter is very difficult. This month, April- there is a big decline. As a result of that, I call it a ‘Black April’ of the global oil industry.

How do you view this agreement that has been come upon by the United States, Saudi Arabia, Russia, OPEC, and all the other players, including Mexico, to cut close to 10 million barrels per day in production starting May 1. Let's talk the politics of this first and then I will get to what the impact is will have on supply and prices.

In the past week, there were two extremely important international metrics. One of them was the OPEC+ countries ended up with an agreement of cutting the production, about 10 million barrels per day, because we have a huge amount of balloon of oil in the market. This is number one.

Number two is important, that is if not more important. There was a meeting of G-20 countries, which was initiated by the International Energy Agency. I have called the Prince Abdul Aziz, the Saudi oil minister because Saudi Arabia is the chair of G-20. Saudi brought G-20 countries around the table and as a result of diplomacy, and I also had very good discussions with the Minister Pradhan of India. Why this meeting was important because it brought around the virtual table countries that are responsible for about 70 percent of global oil production, and 80 percent of global oil consumption. As a result of these G-20 meetings, two important outcomes happened. Number one, producing countries, such as, United States, Canada, Brazil, Norway they said that their production will see a decline, which is according to our estimates an additional 3.5 million barrels per day. Second, some countries such as India, China, Korea and Unites States, they said they are going to buy oil to put in their strategic petroleum reserves. This is also important because it will give a lifeline to the to the oil markets and at the same time, it is very cheap to put the oil in the reserves and is a good thing for energy security. The effort in our view is equivalent to absorbing additional 2 million barrels per day from the market.

It's now these three things put together

• OPEC+ agreement
• G-20 and some countries’ production will decline.
• Buying oil from strategic from the oil markets and putting in their strategic reserves

If these steps were not taken, then the oil prices, the oil industry, would face even much serious challenges as we see today.

The involvement of the U.S. in order to protect its shale gas industry helped cement a deal. It was President Trump's intervention that helped bring Saudi and Russia, and then many other countries to the table, eventually also Mexico. How do you view the geopolitics of this deal, and whether this will stick?

I think the implications are for everybody. Let me tell you that you're completely right. This is highlighted in our report; U.S. shale industry will be negatively affected from that (price decline). Many people in United States working in the oil industry, will lose their jobs, but they are not the only ones. There would be shock waves in the oil industry in effect - not only the workers in the U.S. oil industry, but also workers in the refineries. Refineries are all around the world. In Japan, China, India, Europe as well. It will affect the people. The workers in the retail fuel stations- pump stations, there will be a big wave of unemployment coming there.

I was just talking with the Iraqi minister. In Iraq with the current oil revenues, it is only enough to pay half of the salaries of the government employees. Leave aside the spending in the health sector, social services... And in many countries, the current station in the vulnerable oil producing countries, it may well have implications beyond oil, beyond economic, beyond social and geopolitical implications.

Despite the agreements that you've discussed, we continue to see oil prices decline. Where will prices go from here? I understand the near term contract prices are under more pressure than the medium term prices, but also will the discipline of this very large cartel be maintained?

I would expect this quarter, especially this month, we will see further downward pressure on prices. But if the countries in OPEC+ or G-20 countries would do what they said they would do, and if we see the confinement measures are lifted slowly but surely, we may well see second half of this year, the oil markets start to revive and the oil demand to pick up.

But in order to see in this second half a revival of the oil markets, there are two conditions. One, 100 percent compliance on those agreements on output cuts and second, the gradual lifting of the confinements because the issue is even if oil is cheap, people are not able to use it, because nobody can make use of cheap gasoline because they cannot drive. You cannot make use of cheap airline tickets because you cannot fly. So, therefore, the producers’ next steps are very important. What will happen with the confinement measures, whether or not there will be gradual lifting?

If these things go in the right way direction, we may well see in the second half of this year the oil markets revive.

What kind of recovery in oil prices are you estimating in the second half of this year based on the two conditions that you put down and based on also the third condition of maybe some recovery in the global economy?

So, if these three things come together, we may see a gradual recovery of the demand.

I do not expect that the oil demand in the second half of this year can be at the same time and the same level that we had before the Coronavirus problem.

So should we prepare for oil prices between $20 to $30, if all the conditions you've laid out are met in the second half of this year?

I think we may see the oil prices gradually recover from current levels, but I do not expect that we will see a skyrocketing of the prices. Here it is very important that in these difficult conditions, we also think about the physical access to energy products because people are in confinement. In many countries, I see there are challenges that the citizens cannot have access to all oil products here. I am very pleased with the Indian government just as an example, that they given a free LPG cylinder to many citizens and it is something that is exemplary; the free LPG in the context of the Ujjwala programme.

You mentioned there was a commitment by consuming countries like India and China to make the best of this low price period and to fill up their strategic oil reserves. Any data regards such purchases ongoing, and what it would take to reach capacity level?

So four countries who made those steps, including India, China, United States and Korea - I think it's a very clever political step because when it is cheap, you put it aside, and when the prices go up, you have it in your stocks for the rainy days in the global oil markets. At a price of $20 it is a very good way to go. Currently, those efforts in our estimates are equal to 2 million barrels per day.

So again, if we were not successful in the G-20 meetings and the decision or the OPEC+ meeting, the storage capacity would have reached much earlier and it would be a more serious problem for the oil industry.

What you're saying is if the production discipline is maintained, then this capacity situation might get pushed to beyond June. Is that correct?

Yes, it could be around June. But if there was no G-20 decision, if there was no OPEC+ decision, instead of June, the reaching of full storage capacity would have been a bit earlier.

Would you know how much India has purchased for strategic oil reserves? Because we don't have any data from the government yet.

I think it is Minister Pradhan, who is one of the leaders of global energy diplomacy, who would give a better answer to you. What we know is that India's strategic reserves, first phase is about 40 million barrels (audio unclear). This means that these facilities fit about 55 percent. So this is the data we hear, but the official number you may want to get from Mr. Pradhan’s office.

You mentioned that by June we might reach full capacity for strategic reserves for most countries in the world or at least the larger ones. What is the worst case scenario if the production discipline does not fully hold, if containment measures around the pandemic continue on, and therefore there is no revival in demand even a minor one? Can you explain to us if the world physically runs out of storage capacity in June-July?

If such a scenario happens, which is a definitely a nightmare scenario for the oil industry, global oil industry, consumers or producers alike, we would see a few things among them. Oil prices, will go even further down from the current levels. There will be millions of oil-related workers losing their jobs and the families they are supporting will be affected. Third, several countries who are relying on oil revenues for their economies- I mentioned to you, a few of them. Almost all of them, their economies, social and political stability will be negatively affected. So there'll be a lot of negative implications around the world. Therefore, it is very important what those countries will do what they said they will do. I don't think that those countries cannot afford to not follow the steps what they described in the meetings in the last reach.

While I understand that coming together of all these countries was important to keep the oil industry breathing, as a consumer I must ask about the concern of an even bigger cartel that we’re today faced with.

So I don't think that we can consider countries like the United States or Canada, Brazil and Norway and the others as part of the OPEC+ group. If it was so, then there wouldn't be an additional meeting on last Friday with the consumers together. I think why I asked for such a meeting of G-20 nations around the world is that the situation came to a level that it is becoming a major risk for the global economic stability and global financial stability.

The collapse of the oil industry can send a huge shock wave beyond the oil industry. It is one of the pillars of the global economy. Therefore, we should all hope that time we gained through OPEC+ and more importantly G-20 meetings can be used wisely and that the oil industry makes the right steps and it can survive. As you all know we still need oil industry for producing natural gas for years to come. If you can think, today the masks we use around the world, 90 percent of these masks are products of the petrochemical industry. The sanitisers to clean our hands, they are all products of the again the oil industry. So, we should be hoping that the oil industry can survive and the workers, engineers in the oil fields, refineries and pump stations can keep their jobs.