IHS Markit forecasts February will mark the sharpest one-month decline in oil refining in history due to the continuing outbreak of the highly infectious novel coronavirus in China.
Although global oil refiners had planned to expand production runs by about 760,000 barrels per day (b/d) in February, crashing demand due to continued China production dislocations and overstocked gasoline inventories will result in about a 1.7 million b/d reduction in refining runs, resulting in a record 1 million b/d net decline in production, according to HIS Markit, a London-based global information provider.
China crude oil imports rose for a 17th consecutive year on a booming 9.5 percent year-over-year gain to a record 10.12 million b/d in 2019, according to Reuters. But IHS Markit described the coronavirus outbreak as causing “shockwaves through the entire spectrum of China’s economy, starting from transportation, manufacturing, and construction, all the way down to tourism, retail, and other commercial services, with the oil market among the most acutely affected.”
Mobility in China has shriveled at an unprecedented rate through the extended Lunar New Year holiday due to various government travel bans in 23 provinces and the population’s fears reducing domestic air travel by 51.7 percent; train travel by 68.7 percent; and road travel by 65.1 percent, according to IHS Market surveys.
Bloomberg estimates that the tens of thousands of shuttered cinemas, shops and restaurants nationwide is wiping out $140 billion of Chinese spending per week.
With Middle East oil deliveries to China taking 60 days, including 28 days at sea, the average international price for Brent Crude oil for April deliveries fell on Feb. 10 by $1.20, or 2.2 percent, to close at $53.27 a barrel, its lowest settlement since Dec. 28, 2018. U.S. domestic West Texas Intermediate crude oil price for March deliveries fell by 75 cents, or 1.5 percent, to close at $49.57 a barrel, its lowest price since Jan. 7, 2019.
The new price lows came despite the 13-member Organization of the Petroleum Exporting Countries (OPEC) already curtailing output in January on anticipation of the coronavirus impacts to a multi-year low of 28.35 million b/d, down 640,000 b/d from December. But OPEC’s crude oil production decline was slightly offset by U.S. output that rose an estimated 100,000 b/d in January to an all-time record of 13 million b/d.
The combination of weak fuel demand, logistics restrictions, and reduced worker availability has caused Sinopec and PetroChina to cut refinery runs by 630,000 b/d and 300,000 b/d, respectively. The cuts in the huge state-owned enterprises amount to about 20 percent in Hubei and surrounding provinces, and 10 percent in other less-affected regions. Smaller independent refineries that provide swing capacity are slashing production by 800,000 b/d, for a much larger pre-outbreak level percentage.
IHS Markit does not believe market disturbances will prove as short-lived as the Chinese Communist authorities are trumpeting. With a huge supply chain of oil tankers already en route and domestic storage capacity almost maxed-out, IHS Markit predicts China will need to slash its crude imports by as much as 900,000 b/d on average over the course of the next four months in order to bring the country’s crude supply and demand back to balance.
OPEC has called for an ‘Extraordinary Conference’ on March 5 in Vienna, Austria. IHS Markit forecasts the continuing crash in Chinese demand will exacerbate what is the already sizeable supply glut of over 700,000 b/d global crude oil for 2020.