Oil prices drop below $20 per barrel after IEA announcement

Wednesday ended with losses in oil prices as the latest report from the International Oil Agency uncovered the hit to the global demand of oil.

The US crude futures prices dropped as much as 4.5% to $19.20 per barrel. Brent futures fell 4.6% to $28.25.

The International Energy Agency said Wednesday that global demand for oil is likely to decline by a record 9.3 million barrels per day in 2020 since the coronavirus almost brought fuel demand to a halt.

Demand in April is expected to be 29 million barrels per day, which is a level last seen in 1995. The demand in the second quarter of the year is estimated to be 23.1 million barrels per day. 

ING said in a research note that the market realizes that OPEC+ cuts, while significant, are still not going to balance the market over this quarter. In the meantime, declines from outside the OPEC+ are likely to be market-driven than mandated. Hence, these cuts will be gradual rather than immediate. Most of the decreases in oil production are likely to come from the US and Canada. Still, this idea has run into resistance in Texas, where some drillers in the largest US oil-producing state refused to make more reductions than they considered necessary. Smaller producers were supporting the cuts. Meanwhile, larger producers were more willing to allow for market-driven declines, the International Energy Agency added.

Countries are considering purchasing oil for strategic purposes

Fatih Birol, IEA Executive Director, said that April could prove the worst month ever for the industry. Amid the coronavirus outbreaks, economic lockdowns reduced demand. While 2020 has been the worst year for the industry, April has been the worst month. It may be remembered as Black April, Birol said.

Birol also noted that oil producers lost two critical months, referring to events including the failure of producers to agree on cutting production early in March. Instead of that, Saudi Arabia, Russia, and other countries pledged to increase output.

In addition to planned supply reduction, now some nations are likely to increase buying for strategic reserves. The United States, China, India, and South Korea are considering such purchases. The International Energy Agency is still waiting for more details on planned production cuts and offers to use strategic storage. If the transfers to these stocks took place in the next three months or so, they could represent roughly two million BPD of supply withdrawn from the market.