Instant demand shock: Coronavirus turns oil demand negative
Instant demand shock: Coronavirus turns oil demand negative
The biggest negative oil demand shock since the Great Recession of 2009 is unfolding in China as the spread of the coronavirus has shut down significant transportation and business activity. We estimate that oil demand in China is currently 1.4 MMb/d less than a year ago, which means total world oil demand is also well below the year-ago level. First-quarter global oil demand growth is gone (see Figure 1). This instant demand shock centered in China—previously expected to account for half of world demand growth—will have repercussions elsewhere in Asia and the world. On Monday, President Xi Jinping said the response to the outbreak is “a major test of China’s system and capacity for governance.” There is risk of large oil inventory builds over the next several months—and not just in China, especially if Saudi Arabia and others in the Vienna Alliance do not cut production by enough.
The degree of quarantines and restrictions on travel and commerce in China are unprecedented and could push oil demand even lower. A temporary decline of 3 MMb/d in world oil demand for a month or more cannot be ruled out at this stage given uncertainty about containing the outbreak. Businesses in 21 Chinese provinces have been ordered to remain shut until at least 10 February to reduce transmission of the coronavirus. These restrictions could also lead to faster containment of the coronavirus outbreak.
Saudi Arabia will likely bear much of the burden of production adjustments by the Vienna Alliance, which will be needed if prices are to stay above $50/bbl for Brent. The impact on crude flows will likely be most acute from March to–May. China’s inventories will swell until imports can be adjusted. However, there could be a rebound in China’s oil demand and imports in second half 2020, assuming that the virus is contained and pent-up economic activity unfolds.
Jet fuel, gasoline, and diesel demand are hit hard. Jet fuel demand in China will decline by more than 30% from January to February as international and domestic flights are cancelled. And commerce restrictions—including business and factory closures—mean that demand for road transport fuels has also declined.
Assuming that containment of the outbreak takes hold by March, first-quarter oil demand in China is estimated to be 440,000 b/d less than a year ago. The steep decline in demand began in late January and could begin to ease in March if conditions improve. The severity of the demand impact will be determined by how long the epidemic lasts and how far it spreads. Quarterly year-on-year oil demand declines are rare in China. We estimate that this will be the second largest quarterly decline since 2000.
The degree of quarantines and restrictions on travel and commerce in China are unprecedented and could push oil demand even lower. A temporary decline of 3 MMb/d in world oil demand for a month or more cannot be ruled out at this stage given uncertainty about containing the outbreak. Businesses in 21 Chinese provinces have been ordered to remain shut until at least 10 February to reduce transmission of the coronavirus. These restrictions could also lead to faster containment of the coronavirus outbreak.
Saudi Arabia will likely bear much of the burden of production adjustments by the Vienna Alliance, which will be needed if prices are to stay above $50/bbl for Brent. The impact on crude flows will likely be most acute from March to–May. China’s inventories will swell until imports can be adjusted. However, there could be a rebound in China’s oil demand and imports in second half 2020, assuming that the virus is contained and pent-up economic activity unfolds.
Jet fuel, gasoline, and diesel demand are hit hard. Jet fuel demand in China will decline by more than 30% from January to February as international and domestic flights are cancelled. And commerce restrictions—including business and factory closures—mean that demand for road transport fuels has also declined.
Assuming that containment of the outbreak takes hold by March, first-quarter oil demand in China is estimated to be 440,000 b/d less than a year ago. The steep decline in demand began in late January and could begin to ease in March if conditions improve. The severity of the demand impact will be determined by how long the epidemic lasts and how far it spreads. Quarterly year-on-year oil demand declines are rare in China. We estimate that this will be the second largest quarterly decline since 2000.