The International Energy Agency (IEA) has cut its oil demand growth forecast for the year as the coronavirus outbreak in China continues to take a toll on the global economy.
IEA noted that China’s oil demand has more than doubled to 13.7 million b/d since the SARS (Severe Acute Respiratory Syndrome) epidemic in 2003. China also accounted for more than three-quarters of global oil demand growth last year.
IEA said year/year demand is now expected to fall by 435,000 b/d in 1Q2020, the first quarterly contraction in more than 10 years. Meanwhile, the global energy watchdog cut its 2020 growth forecast by 365,000 b/d to 825,000 b/d.
It’s the latest downward revision as travel and economic restrictions prompted by the virus, officially known as Covid-19, have dimmed the global outlook for oil and gas demand. The Energy Information Administration said last week it expects global liquid fuels demand will average 101.7 million b/d this year, 1 million b/d more than in 2019, but 378,000 b/d less than forecast last month, which it partially attributed to the impacts of the coronavirus.
EIA estimated that China’s petroleum and liquid fuels demand will be cut by an average of 190,000 b/d in 2020 because of the general decline in economic activity, lower jet fuel consumption caused by flight cancellations and the additional impact on the country’s demand for other transportation fuels.
The impacts of the virus are still unfolding as it ripples through one of the world’s largest economies, with manufacturing particularly hard hit. Dun & Bradstreet (DNB), which noted that China’s economy makes up about 20% of the world’s gross domestic product (GDP), said last week that global GDP could fall by 1% this year if containment is delayed beyond this summer.
“Companies outside of China are being affected as their Chinese suppliers are unable to deliver product and materials,” DNB said. “To compound the issue, many suppliers outside of China rely on suppliers in China to fulfill their obligations to their customers. If the outbreak continues, it is likely that the impact to businesses globally will grow and that companies around the world will experience strain as their Chinese partners in the service industry are unable to make payments on invoices.”
The market was already grappling with oversupply before the outbreak. Brent crude oil futures tumbled by $10.00/bbl during January, when the outbreak intensified, and they have seesawed since as doubts have grown about potential supply cuts that the Organization of the Petroleum Exporting Countries (OPEC) and its allies met to discuss earlier this month. Russia in particular has proved reluctant to commit to another 600,000 b/d cut in addition to the 1.7 million b/d output reduction that OPEC and its allies already have in place.
Brent prices gained 43 cents to finish at $57.75/bbl on Tuesday after trading lower earlier in the day. Meanwhile, West Texas Intermediate shed a penny to finish at $51.36/bbl.
“From the point of view of the producers, before the Covid-19 crisis the market was expected to move toward balance in the second half of 2020 due to a combination of the production cuts implemented at the start of the year, stronger demand and a tailing off of non-OPEC supply growth,” IEA said in its latest oil market report. “…Lower oil prices, if sustained, are also bad news for highly responsive U.S. oil companies, but we are unlikely to see an impact on output growth until later this year.”
The EIA still expects West Texas Intermediate to remain above $50.00/bbl this year and average $55.71 in 2020, compared with $57.02 last year, according to its latest Short-Term Energy Outlook. Year/year U.S. oil production is also forecast to grow by 1 million b/d to 13.2 million b/d in 2020, with most of those volumes coming from the Permian Basin, EIA said.
But North Dakota’s chief oil and gas regulator said Friday that the indirect impact of the coronavirus on global oil prices and demand could be felt for the rest of this year by U.S. operators.
“The indications are the impacts from the coronavirus that are beginning to peak now could take the rest of this year to work their way out of the oil markets,” said Department of Mineral Resources director Lynn Helms during a call to discuss year-end production in the state.
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