Global oil markets are facing severe downward pressure as the impact of the novel coronavirus (Covid-19) spreads around the world, which the International Energy Agency (IEA) said raises concerns about whether companies will honour their pledges to transition to clean energy.
The Paris-based agency said on Monday in its latest oil market forecast that demand for crude this year is expected to drop for the first time since the global recession of 2009 because of the deep contraction in consumption in China, and major disruptions to global travel and trade.
The IEA now sees global oil demand at 99.9 million barrels per day (bpd) this year, down around 90,000 bpd from 2019.
“The coronavirus crisis is affecting a wide range of energy markets – including coal, gas and renewables – but its impact on oil markets is particularly severe because it is stopping people and goods from moving around, dealing a heavy blow to demand for transport fuels,” IEA executive director Fatih Birol said.
“This is especially true in China, the largest energy consumer in the world, which accounted for more than 80% of global oil demand growth last year,” he said. “While the repercussions of the virus are spreading to other parts of the world, what happens in China will have major implications for global energy and oil markets.”
Covid-19 has prompted companies around the world to take measures to avoid spreading the virus any further, putting in place travel restrictions, cancelling or postponing conferences, and in some regions mandating that employees work from home.
Birol stressed that the spread of Corvid-19 could have a knock-on effect on the global oil industry’s energy transition plans. “Companies will be faced with lower revenues and their commitments to clean energy transition will be a challenge," he said. "Actors need to behave responsibly.”
Demand growth for gasoline and diesel between 2019 and 2025 is forecast by the IEA to weaken as countries around the world implement policies to improve efficiency and cut carbon dioxide emissions – and as electric vehicles increase in popularity.
Companies will be faced with lower revenues and their commitments to clean energy transition will be a challenge.
The impact of energy transitions on oil supply remains unclear, with many companies prioritising short-cycle projects for the coming years.
“The coronavirus crisis is adding to the uncertainties the global oil industry faces as it contemplates new investments and business strategies,” Birol said.
“The pressures on companies are changing. They need to show that they can deliver not just the energy that economies rely on, but also the emissions reductions that the world needs to help tackle our climate challenge,” he added.
The IEA expects global oil demand to fall in 2020 before sharply rebounding in 2021. It forecasts growth will then be sluggish through 2025 as consumption of transport fuels increases more slowly, the IEA said.
Between 2019 and 2025, the IEA now expects demand to rise at an average annual rate of just below 1 million bpd. Over the period as a whole, demand is foreseen rising by a total of 5.7 million bpd, with China and India accounting for about half of the growth.
Over the same period, the world’s oil production capacity is expected to rise by 5.9 million bpd, with more than three-quarters of it coming from non-Opec producers, the report forecasts.
“But production growth in the US and other non-Opec countries is set to lose momentum after 2022, allowing Opec producers from the Middle East to turn the taps back up to help keep the global oil market in balance,” the IEA said.
Birol warned that at a time when economic diversification is becoming more important, the lack of funds for some oil & gas companies could bring major challenges to their clean energy transition plans.
“This situation has no precedent in the history of the oil market, with a massive oversupply and a severe shock to demand happening at the same time,” Birol said, warning about potential “challenges to stability” in some oil producing countries.
“With oil prices at about $35 per barrel, I’m worried about some of the major oil producing countries where a collapse in the oil price will bring revenues down. It will be impossible to finance healthcare, education and other public services … in places like Iraq, Angola and Nigeria,” Birol said during a briefing call.
· A version of this article first appeared in Recharge's sister publication Upstream