The IEA slashed its demand forecast for the first quarter of 2020, predicting that global oil consumption will contract for the first time in over a decade.
In its first publication on the oil market since the outbreak began, the International Energy Agency (IEA) dramatically revised its oil demand forecast, predicting consumption will actually contract by 435,000 bpd, the first outright decline year-on-year since the global financial crisis more than a decade ago. Previously, the agency expected consumption to increase by 800,000 bpd from a year earlier.
For the full-year in 2020, the IEA cut demand growth by 365,000 bpd to just 825,000 bpd. That would be the lowest annual increase since 2011, and slightly below the growth figures for 2019, which itself was a down year.
The coronavirus continues to ravage China. Beijing released revised data, and the new number of infected cases is vastly higher than previously reported, raising questions about the severity of the crisis.
The number of cases jumped 45 percent after the data revision to nearly 50,000, which increased the global total by a third to 60,000. Those numbers could still be an undercount. Still, the number of new cases on a per-day basis seems to have peaked earlier this month, offering hope that the outbreak is slowing.
Even still, the effects on the oil market are deep. China accounted for about three-quarters of oil demand growth last year, so the crisis has struck a blow to total global consumption. Related: Oil Rig Count Inches Higher As Prices Stabilize
ChemChina, a state-run refining company, announced that it would cut refining runs by 100,000 bpd. According to Reuters, the total refining reductions now total 1.5 mb/d. “As refining crude oil has turned into a loss-making business, (it’s) better to store crude oil instead of refining it,” a source with the company told Reuters.
The IEA’s numbers are based on an assumption that China’s economy “returns progressively to normal in 2Q20.” However, “[t]he crisis is ongoing and at this stage it is hard to be precise about the impact.”
Demand estimates are still a bit of guesswork. A Reuters analysis looks at actual import data from the Chinese government, and finds that in the first 12 days of February, China imported 7.58 mb/d of oil, down from 8.88 mb/d a year earlier, and down from 9.67 mb/d in January. The data also shows that shipping queues are backed up, which suggests that cargoes might unload quickly when port bottlenecks clear.
Meanwhile, financial markets may not exactly be moving on, but the rally in equities on Wednesday suggest that investors are growing confident that the worst may be over. “’Coronavirus? What coronavirus?’ That’s what the markets seemed to be saying Wednesday as the S&P plowed (once again) to all-time highs,” Raymond James wrote in a note.
But the effects will linger, and are not isolated to China. The IEA says that the reduction in trade and tourism could shave off 0.4 percentage points from U.S. GDP growth in the first quarter. Related: Africa’s Largest Oil Nation Could See Production Drop 35%
For the oil and gas industry, the effects are more severe. “Lower oil prices, if sustained, are also bad news for highly responsive US oil companies, but we are unlikely to see an impact on output growth until later in the year,” the IEA wrote in its monthly Oil Market Report. “The effect of the [coronavirus] on the wider economy means that it will be difficult for consumers to feel the benefit of lower oil prices.”
The IEA said that the oil market was already heading into the first half of 2020 with a bit of a supply surplus. The demand destruction as a result of the coronavirus will magnify this overhang. The agency said that the “call on OPEC,” or the amount that OPEC would need to produce in order to balance the market, falls from 29.4 mb/d in the fourth quarter of 2019 to just 27.2 mb/d in the first quarter of 2020. However, the group produced 1.7 mb/d more than that in January, a rather large implied surplus.
That helps explain the group’s rush to coordinate additional production cuts.
Still, the 600,000 bpd would not be enough to close the gap, at least in the first half of the year. That’s especially true if Libya brings disrupted supply back onto the market. But the IEA sees the gap narrowing in the second half as the worst of the coronavirus clears.
By Nick Cunningham of Oilprice.com
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Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. More