This week the International Energy Agency (IEA) weighed in on the biggest question facing the oil market.
“Global oil demand has been hit hard by the novel coronavirus and the widespread shutdown of China’s economy,” the IEA said in its latest monthly report.
Oil demand will fall by 435,000 barrels per day (bpd) in the first quarter, compared with the same period a year ago, marking the first quarterly decrease since 2009, according to the IEA.
Drawing parallels to conditions not seen since the height of the 2008-09 global financial crisis underscores how serious the situation has become.
China’s refiners slashed runs by 1.1 million bpd this month, the IEA said, shaving more than 1% off global demand.
The IEA still forecast oil demand will average 825,000 bpd more in 2020 than 2019, but that was a downward revision of 365,000 bpd compared with last month.
The other major reporting agencies issued similar forecasts this week.
OPEC said oil demand will increase by 990,000 bpd in 2020, a downward revision of 230,000 bpd.
The Energy Information Administration (EIA) cut its forecast for oil demand growth in 2020 by 310,000 bpd to 1.03 million bpd.
The list of refiners cutting back includes state-owned companies (Sinopec, PetroChina, China National Offshore Oil) and independents in Shandong Province.
Signs of a slowdown have begun to appear in the amount of crude oil in storage. This data comes from Ursa which utilizes synthetic aperture radar (SAR) to measure global crude inventories on a weekly basis.
First, here’s a look at Shandong Province, the epicenter for China’s independent (“teapot”) refiners.
As a percentage of capacity, the region has seen inventories increase since late 2019.
Source: Ursa
This week, another factor could’ve been driving inventories higher in Shandong.
Independent refiners, eyeing relatively cheap crude, went on a “buying spree” in the spot market, according to a Bloomberg article.
“After weeks of production cuts, cargo deferrals and cancellations because of the deepening impact of coronavirus on Chinese crude demand, [Shandong’s independent refiners] have returned to the market in a big way,” the article said.
For the country as a whole, China’s commercial crude inventories entered 2020 at levels slightly below 2018 & 2019 for the same time of year.
That was the continuation of a trend that began in Sept 2019 when inventories tightened on the back of strong refinery demand and the temporary disruption of Saudi supply resulting from the Sept-14 attacks.
Source: Ursa
Compared with commercial inventories, the tanks we measure categorized as part of China’s strategic petroleum reserve (SPR) have been more stable.
A curious trend in late 2019 was the gradual decline, erasing the year-on-year surplus.
Source: Ursa
One factor taking pressure off China’s inventories will be fewer imports.
Saudi Aramco will reportedly export less crude to Asian refiners in March in response to customer requests, though a drop is typical for this time of year when refineries undergo seasonal maintenance.
Still, what will coming weeks and months hold if the situation on-the-ground doesn’t improve and oil demand doesn’t bounce back?
Aramco sells crude to Asian refiners under long-term contracts, but there is some leeway allowing customers to buy fewer barrels.
If that happens, then expect to see the inventories rise further in Saudi Arabia and other Middle Eastern producers.
Crude inventories have been building across the Middle East & North Africa since early January.
One factor could be the demand destruction in China, as barrels struggle to find alternative homes.
Source: Ursa
It’s also possible some producers reduced exports without commensurate output cuts, diverting the barrels into storage.
Deeper production cuts by OPEC and its allies went into effect Jan 1. That agreement calls for a 1.7 million bpd reduction.
And now comes the issue of what to do next. Should the OPEC+ group cut flows further?
A technical committee proposed last week that the OPEC+ group reduce output by 600,000 bpd.
The next policy meeting is scheduled for March 5-6, though it could be moved forward if desired.
It doesn’t look like a consensus has emerged whether to be more aggressive. While some members are advocating additional measures, others want to hold off until it’s apparent if the spread of the virus has come under control.
Naturally, oil ministers are watching prices closely. Oil prices tumbled $16 per barrel (-23%) from Jan 6 to Feb 10.
Source: IntercontinentalExchange
If the worst is behind us, then oil ministers may decide not further steps are needed at this time.
That was the implicit message delivered this week by the IEA.
Oil demand will contract this quarter, but for the year, the Paris-based organization still sees positive growth.
What do you think? Will we turn a corner by spring? Or will the outbreak continue into the summer and beyond?
