Oil market preparing for largest contraction in decade

According to new forecasts of the International Energy Agency (IEA) and OPEC, global oil demand will grow at a slower pace this year. Both groups revised their forecasts down by about a quarter largely due to the impact of the coronavirus on the Chinese and global economy.

Global oil demand is set to face its biggest contraction in a decade, reports The National citing the IEA. According to the Paris-based agency, demand growth is expected to fall by 435,000 bpd year on year in the first quarter of 2020 largely because of the impact of the coronavirus on the Chinese economy. “There is already a major slowdown in oil consumption and the wider economy in China,” said the IEA adding that the country had changed enormously since the SARS epidemic of 2003, which is widely used as a reference point for analysis of the current virus, COVID-19, and its influence on the global market.

China’s importance in the crude markets has significantly increased over the last decade. Since 2003, the country’s oil demand has more than doubled to 13,7 million bpd, which amounts to 14% of the world’s total demand for crude. Last year, China accounted for two-thirds of oil demand growth, though with the slowest economic growth in three decades due to the trade war with the US.

OPEC also revised down its demand forecast by 440,000 bpd for the first quarter last week. According to the cartel’s monthly oil market report, oil demand is projected to average 99,95 million bpd in January-March 2020. OPEC’s overall assessment of oil demand growth in 2020 was lowered by 230,000 bpd to 990,000 bpd. The epidemic and its “impact on transportation and industrial fuels in China and other regions” were cited as the main factors affecting the decline. In OECD countries, demand growth is also expected to slide by 80,000 bpd mainly due to a warmer winter in the Northern Hemisphere. In the second half of the year, OPEC expects higher consumption. The IEA revised its full-year forecast for demand growth by 365,000 bpd to 825,000 bpd.

“The lowered forecasts from OPEC and the IEA on top of the news of more coronavirus cases is pressuring oil lower,” commented Head of Research at London Capital Group Jasper Lawler. However, it may force the reluctant hand of Russia to support OPEC+ output cuts, he added. The group, which intends to deepen cuts by additional 600,000 bpd until the second quarter, is waiting for a response from Moscow. The latter requested more time to access the impact of the virus and arrive at a decision. President Vladimir Putin will decide whether to support deeper cuts in a “timely manner”, his spokesperson Dmitry Peskov stated on Thursday.

Meanwhile, Russian oil producers met with Minister of Energy Alexander Novak on 12 February. Most oil company representatives voiced their support for extending the existing cuts until the end of the second quarter but at current production levels rather than with any deeper cuts, says S&P Global Platts.

By Anna Litvina

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