The world is heading towards a global depression, but the market hasn’t quite figured it out yet. Unfortunately, many analysts and economists continue to believe that the worldwide contagion will be generally short-lived, suggesting growth will return in the second half of the year.
A perfect example is the overly optimistic forecasts of global oil demand by the International Energy Agency (IEA). Each month, the IEA puts out their OMR, Oil Market Report on global oil supply and demand statistics. According to the IEA’s January report, it forecasted global oil demand to be 100.1 million barrels per day in the first quarter of 2020.
However, when the February report was released (February 13th), the IEA revised the Q1 2020 global oil demand lower to 98.8 million barrels per day (mbd), due to the significant decline in Chinese domestic oil consumption stemming from the COVID-19 outbreak. But, then when the IEA’s March report was just released, the organization revised the Q1 2020 global oil demand lower again to only 97.6 mbd. I’ll get to my Q1 2020 forecast (in RED) in a minute.
In the article, Oil demand set to contract, says IEA, after 2.5 per cent drop in Q1:
According to the IEA, global oil demand already fell by approximately 2.5% in the first quarter of 2020, wiping out 2.5 million barrels per day (mb/d) in that period, and setting the course for oil demand to shrink by 90,000 barrels per day throughout the whole year.
Global oil supply fell by 580,000 barrels per day in February due in large part to production slowing dramatically in Libya. Conversely, global oil demand unsurprisingly fell by 1.8 mb/d in China, leading to global oil demand’s dramatic decline of 2.5 mb/d.
However, the IEA currently assumes that oil demand will return to “close to normal” in the second half of 2020, after a second quarter in which global oil demand is only “slightly lower” than a year earlier. The IEA therefore expects to see global oil demand in the second half of 2020 to pick up and grow by 1.1 mb/d compared with the second half of 2019.
I disagree with some of the forecasts the IEA stated in the quote above. First, the data in the IEA’s March report is based on statistics from February. While economic activity picked up a bit in March, China’s passenger traffic is still 70-75% less than it was before the Lunar New Year (source: Capital Economics).
Secondly, the IEA stated that Chinese oil demand fell 1.8 mbd, leading to a global oil demand decline of 2.5 mbd. However, this data is still based on February’s statistics. What about March?? How many other countries, such as Iran and Italy, have quarantined major cities. And what about the additional lockdown measures in European countries and the United States? These will mostly take place in March.
Third, there is no way that China’s oil consumption was only down 1.8 mbd in February. Either the IEA totally screwed up on the data or China provided false information that goes along with the CCP, Chinese Communist Party Playbook; a tactic to hide from the world just how bad the COVID-19 situation is in China. If passenger traffic (car, airline, ship, and rail) is still down 70+%, then China’s oil consumption must be at least 3-5 mbd less, not 1.8 mbd.
Please note, while China may be importing oil, refining it, then placing it in storage, the country is consuming one hell of a lot less oil.
So, if we look at the chart again, I believe Q1 2020 global oil demand will fall to 95-96 mbd, maybe even more:
The IEA is behaving much like the governments around the world that are SEVERAL STEPS behind the curve in their response to the COVID-19. I knew when the IEA released its February report; the global oil demand forecasts would be too optimistic. The same thing occurred when the IEA published its March report. And, I imagine the same thing will take place in the April report.
From the article quoted above, the IEA believes global oil demand will return “Close to normal” in the second half of the year. Really?? I don’t see that as a likely scenario. Depending on different sources, the estimated peak spread of the COVID-19 is in May. However, it could go on even longer. But, even if the peak occurs in late May, do analysts really believe that people are going to start jumping back in cars, planes, and on cruises the very next month or several months?? I most certainly wouldn’t.
Or, how about all the economic and financial damage that will be done to small and large businesses as many cities go into lockdown and or in quarantine? Can we turn the global economy back on in a just few months?? In one of Chris Martenson’s recent youtube interviews, he discusses how he is concerned with the breakdown in the complex supply chain. I agree. I don’t believe we have even begun to see the negative ramifications of the collapse in the Just-In-Time Inventory Supply Chain.
If we look at the global commercial air flights, they are already down 5% year over year, as of March 11th:
But, if we compare the global air flight traffic from the peak in January, it is down 9%. We are only starting to see the massive contraction in worldwide commercial air flights. I believe April will show that the BLUE line in the chart will drop like a rock. We shouldn’t be surprised to see global air traffic to decline by 25+% (or MORE) by the end of May.
Thus, by taking account the spread of the COVID-19 in the United States and the rest of the world, my forecast is for global oil demand to fall 10 mbd for 2020, not the 90,000 bd decline forecasted by the IEA:
The IEA also put out its guidance for the Full Year 2020 global oil demand. In the IEA’s January report, it stated that global oil demand would be increase to 101.5 mbd for 2020. However, as we can see, as each report was released, the IEA lowered its forecasts. In its March report, the IEA believes global oil demand will average 100.2 mbd, approximately 90,000 bd less than in 2019.
How can the IEA provide such optimistic forecasts?? Again, I believe Q1 2020 global oil demand will likely be 95-96 mbd. Then it will fall even further in the second quarter to 92-94 mbd as more restrictions, quarantines, and lockdowns take place throughout the world.
With the world shutting down to a larger extent in Q2 2020, this will have a profoundly negative impact on the financial system and economic markets. A large amount of small and large businesses will suffer, which will lead to continued recession-depression in the second half of the year. I don’t see how a quick V-shaped recovery would take place. I might be wrong, but it seems to me that analysts are totally underestimating the impact of this global contagion.
In this last chart, here are the major downturns in the U.S. Economy based on the changes in annual GDP Growth:
During the depths of the 1930’s depression, U.S. GDP growth was a negative 12.9% (1932). After WW2 ended, U.S. GDP growth declined to 11.6% (1946). During the last two major recessions, U.S. GDP growth fell 1.8% (1982) and 2.5% (2009). Currently, forecasts are showing that Italy’s GDP during Q1 2020 could be a negative 2.5%. I also believe this figure is overly optimistic. Regardless, Italy’s economic activity will likely continue to contract in the second quarter, which may fall more than 5+%.
With the United States now closing all sorts of venues, such as Theme Parks, Sporting Events, Schools, Public Gatherings, and so forth, there is no way the country can do so without its GDP falling 5% by Q2 2020. Actually, I believe it will be even higher, maybe 7-10%.
Thus, the global contagion, that is still in the beginning stages, will make the 2008-2009 Financial Crisis pale in comparison.
I will go as far as to say that I doubt Global GDP will ever surpass the $87.2 trillion in 2019 (source: Worldometer). Why? As I stated, when U.S. shale oil peaks, so will global oil production. Falling global oil production translates into declining Global GDP. When oil prices fall to the high teens, it will be the Deathknell of the U.S. Shale oil industry, regardless of bailouts or price controls.
I will be posting a new update on the precious metals shortly.
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