LONDON (ICIS)--China’s coronavirus (Covid-19) outbreak has sent shock waves through global oil markets, cutting first-quarter demand by an expected 435,000 bbl/day and pushing projected growth for the year to the lowest since 2011, the International Energy Agency (IEA) said on Thursday.
The outbreak is expected to trim 2020 crude demand growth by around 365,000 bbl/day to 825,000 bbl/day, the lowest level in nearly a decade.
2019 demand was also weaker than expected after below-forecast weakness in OECD countries cutting consumption growth to 885,000 bbl/day.
Global refinery output is also expected to be weaker, with the IEA slashing China crude throughput projections by 1.1m bbl/day for the first quarter of the year to an expected contraction of 500,000 bbl/day.
The coronavirus outbreak casts doubt on projections that oil market supply and demand would slowly move into balance in the second half of 2020, with Brent crude values falling around $10/bbl in January.
“Before Covid-19 came along, the market was already nervous in anticipation of a supply overhang of 1m bbl/day in the first half of 2020 due to continued expansion in the US, Brazil, Canada, and Norway,” the IEA said in its monthly Oil Market Report.
The 2003 SARS epidemic has been widely used as a yardstick of the potential impact of coronavirus on global markets, but China’s position in the world has evolved dramatically since the start of the millennium, the IEA noted.
“Today, [China] is central to global supply chains and there has been an enormous increase in travel to and from the country, thus heightening the risk of the virus spreading,” the Agency noted.
Chinese oil demand has risen to 13.7m bbl/day in 2019, compared with 5.7m bbl/day in 2003, and the country accounted for over three quarters of global oil demand growth last year, despite the GDP expansion falling to the weakest level in years as a result of the trade war with the US.
The country was expected to represent over a third of global oil consumption this year, and is now expected to comprise less than a fifth, according to IEA projections.
The IEA’s estimates of a 365,000 bbl/day drop in demand is at the lower end of the 300,000-500,000 bbl/day guidance set out by BP management earlier this month.
OPEC+ countries are considering further output cuts later this year, but the impact of the outbreak means that the cartel would largely be cutting to stand still, with a potential cut of up to 600,000 bbl/day likely to offset the shortfall but unlikely to tighten the market significantly.
Reduced OPEC+ production on the back of the curtailment agreements brokered between member states continue to be counterbalanced by growing supply, with global output largely steady in January as a 2.1m bbl/day increase in non-OPEC production, the IEA said.
There is also the question of the impact of the outbreak on global GDP growth. The IMF projected earlier this year that the bulk of global GDP expansion through to 2021 would be generated by emerging markets, but the outbreak comes at a time when the industrial downturn was perceived to have bottomed out.
Sustained lower oil pricing could stand to reduce US supply as onshore players – which can be more responsive to market shifts than large conventional producers – curtail production, but this is unlikely to have a significant impact on growth until later in the year, the IEA added.
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