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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Oil Prices Already Reflect Huge Demand Destruction

OPEC+ is moving quickly to try to halt the meltdown in oil prices as the demand hit from the coronavirus continues to grow.

The Joint Technical Committee (JTC) meets Tuesday and Wednesday to assess the damage and to recommend a course of action. Press reports suggest OPEC+ is considering deeper cuts on the order of 500,000 bpd to 1 million barrels per day (mb/d). The rumor was enough to halt the slide in oil prices on Tuesday, after WTI briefly dipped below $50 per barrel during intraday trading on Monday.

BP’s CFO Brian Gilvary said that the coronavirus could shave off 300,000 to 500,000 bpd from demand growth this year. “We will see how it plays out, but that will soften (demand). If OPEC roll their cuts through the end of year, that should sweep up any excess of supply and re-balance the market,” he told Reuters.

Oil prices have declined by 20 percent decline over the past month. The oil market was “already slightly oversupplied in January,” before the outbreak of the coronavirus really began to hit, Commerzbank said in a note on Tuesday. Whether OPEC+ can balance the market will “depend chiefly on Saudi Arabia,” the bank said. “After all, the restrictions to crude oil processing that have been announced in China will total nearer to 1 million than 500,000 barrels per day.”

Meanwhile, Goldman Sachs is out with a note that digs a little deeper into the demand side of the equation. The $11-per-barrel decline in oil prices over the past few weeks is “effectively pricing in a large oil demand shock,” Goldman analysts said. “Illustrating this dynamic, the recent move of front-month Brent timespreads into contango - for the first time since last July - would be consistent with the physical market suddenly shifting into a large surplus.” Related: New Tech Could Unlock An Alaskan Oil Boom

Of course, estimating the specific hit to demand is still guesswork – much depends on the duration and severity of the crisis. Still, Goldman Sachs said that its model, which incorporates shifts in the structure of the oil futures curve as well as inventory levels, results in an estimated loss of 500,000 bpd in demand growth.

But then, the bank also factors in a 50 percent chance of a 500,000-bpd cut from OPEC+, and it also assumes the 1 million-barrel-per-day (mb/d) outage in Libya lasts through early March. That brings the demand destruction total up to 750,000 bpd relative to the bank’s original forecast.

The coronavirus also cuts into GDP growth by 0.44 percent. “Such a global GDP hit would be even larger than the worst case scenario that our economists laid out in their latest assessment of a two quarter hit, suggesting that the oil market is already pricing in a significant demand shock relative to other assets,” the bank concluded. Related: Why Europe's Gas Glut Is Worsening

However, because so much of this is already baked into the price, Goldman analysts say there is “only modest further downside potential.”

In another study, investment bank Standard Chartered said that much depends on Libya, which is garnering surprisingly little press attention given the severity of that country’s crisis. The civil war rages on, and the LNA has effectively blockaded much of the country’s oil exports.

If the 1-mb/d outage in Libya persists, the surplus in the market for the first half of the year because of the coronavirus would be offset by the deficit in the second half of 2020, “even under our most severe demand scenario,” Standard Chartered said in a note to clients. “However, while the Libyan outage might delay or reduce the reaction, pressure on prices is likely to force an additional OPEC cut despite potential H2 tightness.”

There are so many variables that any pricing forecast goes out the window if one factor plays out differently than expected. But OPEC+ is not taking any chances. The Joint Technical Committee (JTC) meets on Tuesday and Wednesday, and a full ministerial meeting is expected late next week.

By Nick Cunningham of Oilprice.com

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  • upL8N8 upL8N8 on February 04 2020 said:
    That's great.. which OPEC countries will be the ones to take the brunt of the production cut? We already have Iran and Venezuela locked out of the market, and Libya is basically out of the market. Each of the OPEC countries is struggling with low oil prices right now, and if they cut production, there's a chance another nation *cough* US shale / Canadian oil / Mexico / Brazil *cough* will make up the production difference if prices rise, resulting in minimal improvement to oil prices but loss of market share by those who cut. It was just reported that Russia is producing a record amount of oil; will they cut?

    I wouldn't be surprised if the "rebel General" (what is this star wars?) in Libya or even Libya as a whole is getting a payout to keep their oil off the market. There's certainly financial incentive to justify it. Bringing Libya oil back online could send oil into the low $40s. (WTI) At 90 million bpd production, a $10 cut in oil prices is worth $900 million per day, or $328 billion per year. Decision time. Kill the general and lose up to $328 billion per year, or pay him a few million and send him shiny new weapons?
  • Mamdouh Salameh on February 05 2020 said:
    No they don’t. No one can correctly estimate the global oil demand loss until the coronavirus is contained. Still a loss of 500,000 barrels a day (b/d) amounts to 42% decline in the projected oil demand growth of 1.2 million barrels a day (mbd) in 2020. If this is the case, then global oil demand in 2020 could average 101.8 mbd compared with 101.0 mbd in 2019.

    The problem with analysts, investments banks and oil market traders is that they have a tendency to treat speculation as a truth without concrete evidence.

    For instance, yesterday an analyst speculated that China’s oil demand COULD decline by 20% amid the coronavirus outbreak and within a short space of time the speculation has morphed into a full blown truth that “Chinese demand PLUNGED by 20%.

    With China virtually in quarantine and therefore closed to business and unable to receive crude oil shipments, speculators are having a field day offering wild speculations which find their way into contributors of articles to the oilprice.com who readily treat them as facts without verification. That is partly what is pushing oil prices down.

    The coronavirus outbreak in China is an aberration. By definition an aberration is a departure from what is normal, usual or expected, typically an unwelcome one. It comes suddenly and disappears as fast as it took to appear.

    A speculated loss of global GDP growth by 0.44% as a result of the coronavirus is far less than the 0.9% the global GDP suffered in 2019 from the trade war according to the International Monetary Fund (IMF). Yet global oil demand grew by 1.2 mbd to an annualized average of 101.0 mbd.

    Since 2011 the global oil market has factored in Libya’s outage. Libya’s oil production has become a footnote at the global oil market hence the market’s lack of response even when Libya’s production has dwindled to under 200,000 b/d recently.

    OPEC+ will be making a huge mistake if it acts to deepen the current production cuts as such a move will have no effect whatsoever on oil prices while the coronavirus is raging and will only lead to loss of its market share.

    I am convinced that once the coronavirus is contained, China’s oil imports will come back roaring with oil prices recovering all their losses. As a reminder, China’s crude oil imports broke all previous records in the last quarter of 2019 when they hit 11.76 mbd.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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