IEEJ：April 2020 ©IEEJ 2020
Special Bulletin
A Japanese Perspective on the International Energy Landscape (476)April 16, 2020WTI Sank below $20/bbl on Forecast Worst Contraction since Great Depression
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn April 15, the front-month West Texas Intermediate crude oil futures contract closed $0.24
per barrel lower than on the previous day at $19.87/bbl, slipping below $20/bbl on a daily closing
basis for the first time in 18 years, since February 2002. On the same day, the front-month Brent
contract lost $1.91/bbl to $27.69/bbl.
WTI fell to $20.09/bbl on March 30, coming to the brink of sinking below $20/bbl. In theface of the crude oil price crash, oil-producing countries tried to reconstruct their joint production cut
initiative broken up in early March and enhance production cuts. After U.S. President Donald Trump,
who was hard hit by the oil price crash, mediated between Russia and Saudi Arabia amid an oil pricewar, the Organization of the Petroleum Exporting Countries and non-OPEC oil-producing countriesagreed to cut their production by 9.7 million barrels per day. In addition to the largest ever production
cut by the OPEC-plus group, other oil-producing countries could come up with their own production
reduction. Total production cuts are expected by some analysts to exceed 10 million bpd to around 15
million bpd.
On news that oil-producing countries would reconstruct the joint production cut initiativeand enhance production cuts, crude oil prices rebounded once, with WTI rising back above $28/bbl
on April 3. After the production cut agreement was announced, however, crude oil prices crept down
again, with WTI falling below $20.
This is because a massive oil demand decline that would accompany a steep global economic
contraction to be caused by the Coronavirus Disease 2019 pandemic is widely expected to overwhelm
the production cuts.
On April 14, the International Monetary Fund released its latest World Economic Outlook
forecasting that the global economy would contract by 3.0% in 2020. Even before the release, the IMF
had been warning of a substantial contraction in the 2020 global economy. However, the specificforecast of the 3% contraction surprised market participants, impressing them with the devastating
COVID-19 impact.
The IMF WEO in January forecast the global economic growth rate at 3.3% for 2020. In
only three months, the forecast was revised down by 6.3 percentage points. Particularly serious
contractions are forecast for Western countries devastated by the pandemic. The U.S. economy ispredicted to post a 5.9% contraction (against a 2.0% rise forecast in January) and the eurozone
economy a 7.5% contraction (against a 1.3% rise). Non-OECD economies, which have driven global
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economic growth, are forecast to contract by 1.0%, instead of growing by 4.4% as predicted in January.
The forecast global economic contraction of 3.0% far exceeds a 0.1% contraction in 2009 amid theglobal financial crisis and is the steepest since the Great Depression that started in 1929.
As human and goods traffic is strictly restricted to prevent expansion of COVID-19,
economic and business activities stagnate. The serious deterioration of the real economy has shaken
financial markets and systems, exerting further adverse effects on the real economy. The world has
thus plunged into a vicious cycle. Depending on the future status of the pandemic, the global economy
could deteriorate further. No optimism can be warranted. In a scenario where the pandemic would be
more serious and prolonged, the IMF indicates that the global economy could contract by an additional
3% in 2020.
In response to the forecast contraction in the global economy, the International Energy
Agency on April 14 released a report leading energy market stakeholders to reaffirm the massivenessof the demand shock. The latest IEA Oil Market Report states that global oil demand in 2020 would
decline by 9.3 million bpd or 9.3% from 99.85 million bpd in 2019 to 90.55 million bpd. The steep
demand decline of 9.3 million bpd amounts to a demand destruction. A demand drop through an
economic contraction amid the pandemic would be combined with a plunge in international passenger
and goods traffic demand amid the lockdown to bring about a massive demand shock. The traffic
demand plunge is destined to seriously affect demand for oil as a key energy source for transportation.
All quarters of 2020 are forecast to see steep year-on-year oil demand plunges. In the second
quarter, particularly, oil demand is projected to post the sharpest year-on-year decline among thequarters of 23.15 million bpd or 23.3% to 76.06 million bpd, reflecting the steepest macroeconomicplunge and the most serious lockdown assumed for the quarter. The world has never experienced suchenormous oil demand decline.
The massive demand destruction almost nullifies the effect of even the largest ever joint oilproduction cuts totaling 9.7 million bpd, exerting the abovementioned downward pressure on crude
oil prices. If without the reconstruction of the joint production cut initiative, oversupply would expand
dramatically to bring about a further oil price fall. It was inevitable for oil-producing countries tomanage to restore joint production cuts to avoid the worst scenario.
The abovementioned IEA report points out that the crude oil supply-demand balance in thesecond quarter of 2020 indicates a crude oil supply excess of 11.9 million bpd, leading to substantial
inventory build. Based on onshore crude oil inventory storage capacity (covering both government
and private sectors) and various operational assumptions, total crude oil inventories are estimated toexceed operational inventory storage capacity in sometime in May or June. In addition to onshore
inventory storage capacity, large tankers and other means may have to be used to absorb crude oilinventories. The international oil industry and oil supply system will be required to prevent the oilmarket from being overfilled. As far as such tense situation is sustained, downward pressure may
remain on crude oil prices.
Excessive crude oil price falls would impoverish oil-producing economies, disrupt
necessary energy investment, and shake the stock market in a manner to destabilize the international
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financial system. To avoid such negative effects, all the relevant countries should consider all possible
measures and cooperate to stabilize oil-producing and -consuming countries and the entire world, as
discussed at meetings of the Group of 20 major countries.

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