Global Oil Demand in Freefall on Pandemic, IEA Chief Says

(Bloomberg) -- Global oil demand is in freefall because of the coronavirus pandemic, a situation that is exacerbated by the price war between Saudi Arabia and Russia, the head of the International Energy Agency said.

Fatih Birol’s comments add to the dire outlook for the oil market with traders, banks and analysts forecasting a huge oversupply as governments shut their economies to combat the contagion. The effects of the glut will be felt for years to come, Birol said.

“Today 3 billion people in the world are locked down. As a result of that, we may see demand fall” by as much as 20 million barrels a day, IEA’s Executive Director Birol said at an online event hosted by the Atlantic Council on Thursday.

The decline in demand is likely to worsen in the second quarter from the previous three months, he said. Earlier this week, Russell Hardy, the head of trading behemoth Vitol Group, said consumption of crude has dropped by between 15 million and 20 million barrels a day, and will be lower by at least 5 million a day this year.

The market is being hit on an unprecedented scale by a combination of demand destruction and a supply surge following the breakdown of Saudi Arabia and Russia’s partnership. This is filling up inventories quickly, and Birol said oil storages may become full “very soon.”

He urged major producers to be more responsible.

Production Hit

Still, there are signs that current price levels are starting to hit production. Brazil’s Petrobras is reducing output and some fields in the North Sea have turned uneconomical. Most of the world’s biggest companies have also slashed their budgets for this year. A major decline in U.S. shale output is likely from the next quarter, according to Birol.

“With these prices, we will see a major decline in shale production in the United States, no question about that,” Birol said. There will be “huge suffering” for the American oil industry, he said.

The pandemic is taking a toll on most commodity markets. Gas demand in Europe and Asia is being “heavily affected,” according to Birol. A nationwide lockdown in India has forced companies in the country to delay or cancel liquefied natural gas purchases.

Many LNG exporters such as Australia, Qatar and Algeria, whose contracts are mainly linked to crude oil prices, will suffer, he said.

“And I would expect that U.S. LNG will be also negatively affected,” Birol said. “We may see around the world a lot of shut-ins” or shut downs of LNG plants.

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