Oil demand falls on coronavirus: how much will inventories rise?


The outbreak of the coronavirus has dealt a severe blow to oil demand causing prices to plummet the last few weeks, with benchmark Brent crude down nearly 20% year-to-date.

The presumption is that crude inventories will rise as refineries cut runs, first in China and possibly elsewhere if the virus cannot be controlled.

Our latest data shows some examples of rising inventories in China, while overall, storage levels can be described as medium-full.

China’s total crude inventories (commercial + strategic reserves) equal approximately 60% of capacity.

The majority of the storage sites we monitor in China are located on the coast, alongside ports and refineries serving the massive population centers.

We measure global crude inventories on a weekly basis using radar satellite imagery.

One of the sites closest to Hubei Province, where the coronavirus originated, is the city of Zhoushan, which is also home to a mega-refinery that opened last year.

Zhoushan commercial inventories increased by almost 4.9 million barrels (+9.3%) to 57.3 million barrels the week of February 6, according to our data. As a percentage of capacity, Zhoushan was 63.5% full.

China’s total commercial inventories have actually fallen slightly so far in 2020, sitting just below 58% of capacity, Ursa data shows.

That’s a lower percentage than at the same time of year in 2019 and 2018.

Source: Ursa

Source: Ursa

Storage tanks designated as part of China’s strategic petroleum reserve (SPR) are more stable than commercial inventories. However, the SPR stocks we monitor declined gradually in late 2019 and entered 2020 at around 80% of capacity.

Source: Ursa

Source: Ursa

There are only a few locations we monitor where crude commercial inventories are less than half-full.

The maps below show a sample of our China coverage. Blue circles are spots above 50% capacity, while red equals less than 50% capacity.

Source: Ursa

Source: Ursa

Source: Ursa

Source: Ursa

A closely-watched region is Shandong Province because independent (“teapot”) refineries are located there.

The independent refineries reportedly slashed refinery runs by 30%-50% this week, exerting more upward pressure on crude inventories.

Shandong Province crude inventories have been rising since mid-December. The latest turn-of-events should guarantee that trend continues.

Source: Ursa

Source: Ursa

With flights canceled, quarantines in place and cities sealed off, there are far fewer planes in the air and vehicles on the road.

The impact is initially felt in the market for refined products, like jet fuel, diesel and gasoline. As product demand sags, it isn’t long before refiners cut back on runs, extending the chain reaction into the crude oil market.

BP’s Chief Financial Officer said this week he believes global oil demand in 2020 could drop by up to 0.5%, equivalent to 300,000 to 500,000 barrels per day (bpd).

Oil prices have fallen sharply as traders brace for the impact of less demand.

Source: Intercontinental Exchange (ICE)

Source: Intercontinental Exchange (ICE)

 ICE Brent futures settled below $54 per barrel February 3, a low going back to December 2018 and down 22% from January 6.

The weakening of term structure was also devastating to traders with bullish positions.

The spread between ICE Brent’s front-month and second-month contracts has been in contango this month for the first time in March 2019.

It’s been a remarkable change. ICE Brent’s April/May spread was -$0.35/b on February 7 versus $0.88/b on January 8.

Source: ICE

Source: ICE

This turn-of-events is a far cry from the start of the year. A deeper round of production cuts by OPEC and allies went into effect on January 1.

ICE Brent closed January 6 at almost $69/b, the highest level since September 16 in the aftermath of the historic attack on Saudi Arabia’s oil infrastructure.

Since the attack occurred, global crude inventories have been lower year-on-year, a sign of decent fundamentals justifying higher oil prices.

Source: Ursa

Source: Ursa

With oil prices spiraling downward, a technical committee advising the OPEC+ coalition recommended making a 600,000-bpd cut.

If adopted, this would help remove supply from the market that otherwise could end up in storage.

For US oil producers, who keep churning out more supply every year, the loss of customers in Asia will force them to search elsewhere for buyers.

A likely destination is Europe. There’s already been a pick-up in activity to charter Aframax vessels on the trans-Atlantic route, though the net impact of reduced Chinese demand on global freight rates is likely bearish.

Unless European refiners can absorb this extra supply, storage levels should rise.

We’ll keep you posted on how this major story unfolds.

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