Global oil demand is expected to suffer its first quarterly contraction in over a decade, according to the International Energy Agency (IEA), with OPEC also revising downward its crude demand projections, and both organizations blaming the coronavirus for the sector’s woes.
The spread of the deadly virus, known officially as COVID-19, has both disrupted the economy of China, the world’s biggest importer of crude, and shaken energy markets.
Brent crude oil futures have fallen over 20 percent since the beginning of the year and have remained choppy into February, struggling to retrace any significant gains.
“Global oil demand has been hit hard by the novel coronavirus (Covid-19) and the widespread shutdown of China’s economy,” the IEA said in its February 2020 Oil Market Report.
Demand is expected to contract by 435,000 barrels per day (bpd) in the first quarter of 2020, the Agency said, which is the first quarterly decrease in more than a decade. For 2020 as a whole, the IEA has reduced its global oil demand growth forecast by 365,000 bpd to 825,000 bpd, the lowest level since 2011.
OPEC, meanwhile, noted in a separate report that world oil demand for all of 2020 is now expected to rise by 990,000 bpd, which is around 19 percent less than its earlier forecast.
“The impact of the coronavirus outbreak on China’s economy has added to the uncertainties surrounding global economic growth in 2020, and by extension global oil demand growth,” the report said.
“Clearly, the ongoing developments in China require continuous monitoring and assessment,” OPEC added.
‘Coronavirus Outbreak Defies Analysis’
Oil prices ticked up on Friday and were on track for their first weekly gain since early January as investors bet the economic impact of the virus might be short-lived.
Brent crude was up $1.05 cents, or 1.9 percent, at $57.39 a barrel by 1437 GMT. It has risen 5.4 percent since last Friday, its first weekly increase in six weeks.
U.S. West Texas Intermediate (WTI) was 74 cents, or 1.4 percent, higher at $52.16 a barrel, up 3.7 percent for the week.
“Experts following the oil markets are throwing up their hands. The coronavirus outbreak defies analysis,” said J. Jay Park, CEO and Founder at ReconAfrica, an oil and gas company, in an emailed statement. “None of the markets are acting consistently with what happened in the past. This seems like sentiment is overtaking the market. The price of oil now does not justify the actual demand for oil.”
“The weaker oil demand outlook does not come at a good time, with oil prices down twenty percent in the last month,” said Allen Sukholitsky, Founder & Chief Macro Strategist at Xallarap Advisory, in an emailed statement. “However, as the year progresses, we expect to see a bounce in prices driven by lower supply growth.”
He explained that over the last decade, producers have increased production by shifting more of their drilling to the most productive wells and that today, rig counts are down sixty percent from their 2014 peak.
“How will producers boost production if lower prices are putting pressure on drilling activity and the wells being drilled right now are the most productive?” Sukholitsky noted.
“Experts also are saying 1 million to 3 million barrels a day are being affected by a demand crunch. That’s only 1 percent of production. That shouldn’t translate to a $13 drop in prices,” Park added. “The demand for oil and gas is inelastic, so price changes are always more severe than demand. If demand goes down a little, the price goes down a lot. In other words, the coronavirus impact does not justify a 20 percent price reduction.”
“All in all, I think fear is driving the market,” he added.
‘Can’t Help But Move to Risk-off Trades’
On Thursday, China’s Hubei province, the epicenter of the coronavirus outbreak, reported 14,840 new cases of the virus as of Feb. 12, up from 1,638 new cases on Tuesday. The number of deaths in the province rose by 242, a daily record, to 1,310, according to official figures, which carry an overcast of uncertainty due to widely reported questions around accuracy and manipulation.
“When you see numbers like this, you can’t help but move to risk-off trades, which means buy the yen and sell stocks,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank in Tokyo, in comments to Reuters.
Wall Street’s main indexes eased from record highs on Thursday, while a day earlier, investors bought on signs that the virus spread was slowing, lifting the benchmark S&P 500 and the Nasdaq to their third straight closing highs.
The VIX, which measures volatility in the S&P500, spiked on Thursday as coronavirus news buffeted markets, but then fell, suggesting easing of investor concern.
“It seems as if every time there’s new coronavirus news, the market sells off and then quickly rebounds. Sometimes in a day or two, sometimes even the same day,” said Marc Lichtenfeld, Chief Income Strategist at The Oxford Club, in an emailed statement to The Epoch Times. “Short-term corporate earnings may be negatively affected, but there likely won’t be much long-term impact,” he predicted.
“Investors that own solid companies should stay the course and not worry about jumping into safe havens because of the virus,” he added.
Seaborne Crude Demand Plummets
In further signs of slowing Chinese demand for oil, seaborne crude oil shipments to China have plummeted amid the virus outbreak, a study by a shipping insights and analytics firm reveals.
Using satellite tracking technology, VesselsValue compared China’s real-time demand for seaborne crude oil from the Middle East in recent weeks against the same period in 2019. The figures show that Chinese demand for crude oil tankers, a proxy for crude demand, fell to almost zero in recent weeks, compared to an average of 3.42 billion ton miles per day in the same period last year.
“Most years, there is a mild slowdown of activity in Chinese ports surrounding the Chinese New Year, but this time the effects have been significantly compounded,” the company said in a release, blaming the dramatic drop in demand on the epidemic.
“An event like coronavirus really does show the gravitas of China on global shipping markets,” the company noted.
Reuters contributed to this report.