OPEC slashed on Wednesday its global oil demand growth forecast for 2020, expecting the coronavirus outbreak to weigh heavily on fuel demand in the world’s oil demand growth driver, China.
In its closely watched Monthly Oil Market Report published on Wednesday, OPEC slashed its oil demand growth estimate by 230,000 bpd from last month’s assessment and now sees global oil demand growth at just below 1 million bpd this year—at 990,000 bpd. The coronavirus outbreak which is crippling oil demand amid travel restrictions and industrial activity slowdown is the major factor behind the slashed demand growth forecast, OPEC said.
“The recent outbreak of the coronavirus in China necessitated a further downward revision to the country’s oil demand growth forecast compared to last month, as transportation fuels, notably aviation fuels, are expected to be impacted in 1H20,” the report reads.
OPEC revised down its oil demand estimate for China by 400,000 bpd for H1 and by 200,000 bpd for the full year 2020.
“The impact of the Coronavirus outbreak on China’s economy has added to the uncertainties surrounding global economic growth in 2020, and by extension global oil demand growth in 2020,” OPEC said.
The cartel also revised down its estimate of demand for OPEC crude by 200,000 bpd to 29.3 million bpd, or about 1.3 million bpd lower than the 2019 level, also due to the coronavirus outbreak and its expected impact on China’s oil demand and, by extension, global oil demand. Related: Oil Traders Could Lose Big On Coronavirus Panic
OPEC’s production, including Ecuador, plunged by 509,000 bpd compared to December, to 28.859 million bpd in January, the first month in which the deeper cuts are in force, according to OPEC’s secondary sources.
Yet, the current deeper cuts are unlikely to be enough to prevent another glut from building as the depressed oil demand in China is inflicting the worst shock to oil demand in over a decade.
The technical panel of the OPEC+ coalition is recommending extending the current cuts through the end of 2020 and an additional cut until the end of the second quarter, due to the coronavirus outbreak.
OPEC’s key ally in the deal, Russia, however, has taken time to assess the recommendation and has yet to convey its position on even deeper cuts in Q2.
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By Tsvetana Paraskova for Oilprice.com
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Once the outbreak has been contained, China’s oil imports and oil prices will rebound and recoup all their recent losses.
Therefore, any new cuts or deepening production cuts by OPEC will be a total waste and futile with no effect whatsoever on oil prices and will only lead to a loss of market share.
Even if OPEC’s production plunges by 2.0 mbd on top of Libya’s virtual loss of its production amounting to 1.0 mbd, it will not stop the continued decline in global oil demand and prices as long as the outbreak is still raging.
Russia is yet to be persuaded by the need for new cuts. Russia’s economy could live with oil prices at $40 or even less.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London