The oil markets have been anticipating a big impact on oil demand from the coronavirus outbreak. That’s why we have seen a 30% drop in the price of crude oil since the beginning of January.
But we now have some indication of just how much oil demand has been impacted: It’s the largest quarterly demand drop we have ever seen.
Those are the findings from the latest assessment by the IHS Markit Crude Oil Market Service.
IHS Markit projects that Q1 2020 world oil demand will decline by 3.8 million barrels per day (BPD) from a year earlier. This represents a downward revision of 4.5 million BPD from estimates prior to the outbreak. Previously, the largest quarterly decline was during the financial crisis of 2009, when Q1 oil demand fell 3.6 million BPD year-over-year.
Jim Burkhard, vice president and head of oil markets at IHS Markit, noted “This is a sudden, instant demand shock—and the scale of the decline is unprecedented.”
The IHS Markit assessment also made the following observations:
- Most of the demand decline is in China, but demand elsewhere, including Europe, Japan, South Korea, the Middle East, and North America, has been revised down.
- COVID-19 cases outside of China continue to accelerate, which means that the negative demand impact will continue into the second quarter.
- Demand for all refined products is negatively impacted, but especially for gasoline in China because of the steep decline in road travel as a result of government restrictions and for jet fuel due to flight cancellations within China and the long-haul routes to and from Asia. In China, commercial passenger trips by road, rail, air, and water were down 80 percent in February compared with a year ago.
- OPEC production is at a 17-year low and could drop even further as oil buyers cut purchases in March and April. But the decline in output is still less than the decline in demand, which means oil inventories are likely to experience a large increase, particularly in China and the Middle East, unless OPEC at its ministerial meeting later this week cuts production in a major way.
- It now appears likely that oil demand will be less than in 2019, even if there is a recovery in the second half of 2020.
I often write about fundamental disconnects in the oil markets. That can occur when oil prices are declining, but the underlying fundamentals are strong. This situation is very different. This price decline is entirely warranted by such a steep decline in oil demand. Further, there’s not a good indication of where the bottom may be.
Since OPEC failed to get an agreement with Russia for additional production cuts, it’s not out of the question that oil prices could drop back into the $20s as the coronavirus outbreak continues to spread.