Oil prices rose on Tuesday, with Brent crude above $40 a barrel, after the IEA increased its oil demand forecast for 2020 and as record supply cuts provided support.
Both the North Sea and U.S. contracts gained around 4%, with U.S. oil rising $1.75 to $38.77 a barrel.
Brent crude was up $1.49 at $41.32 a barrel.
In its monthly report on Tuesday, the International Energy Agency (IEA) forecast oil demand at 91.7 million barrels per day in 2020, 500,000 bpd higher than its estimate in May’s report, citing higher than expected consumption during the lockdowns.
But the agency said a fall in flying because of the novel coronavirus means the world will not return to pre-pandemic demand levels before 2022.
Oil supplies in May, the IEA said, plunged by nearly 12 million bpd, with the Organization of the Petroleum Exporting Countries and its allies including Russia – a grouping known as OPEC+ – reducing their output by 9.4 million bpd.
This means OPEC+ hit 89% compliance with agreed cuts in May, the IEA said.
OPEC+, agreed this month to extend production cuts of 9.7 million barrels per day through July. It also called on members that have not been complying to make up their commitments with extra cuts later.
Iraq, which had one of the worst compliance rates among the major producers, has already made deep cuts to its crude supplies to Asia in July.
U.S. shale producers are also reducing drilling in response to the collapse in oil demand.
Production from seven major U.S. shale formations is likely to drop to close to a two-year low of 7.63 million barrels per day by July, the U.S. Energy Information Administration said on Monday.
Despite the prospect of reduced supply, concerns about a second wave of lockdowns from rising infection rates weighed on the market.
Coronavirus cases rose to more than 8 million worldwide by Monday, with infections surging in Latin America, while the United States and China are dealing with fresh outbreaks.
“If the world treats a second COVID-19 wave like in the first half of the year, then we are in for a demand reduction that was not in the initial planning,” Head of Oil Markets at Rystad Energy Bjornar Tonhaugen said.