A month ago, the International Energy Agency (IEA) forecast that first-quarter 2020 demand for crude oil would grow by 1 million barrels a day compared with the same period in 2019 and that for all of 2020 demand would rise by 1.2 million barrels a day.
In its February Oil Market Report released Thursday, the agency has cut its first-quarter forecast by 435,000 barrels a day and its full-year forecast by 385,000 barrels a day to 565,000 barrels and 825,000 barrels, respectively.
Both the January and February estimates were driven by black swan events. In January, the U.S. drone attack that killed Iranian Lieutenant General Qasem Soleimani sent tremors through global crude markets and OPEC+ announced a total production cut from 2018 levels of 2.1 million barrels a day. This month, the outbreak of the coronavirus (now officially called Covid-19) has sent crude prices plunging as quarantines and shutdowns across China have put a serious crimp in demand for energy.
According to the IEA, Brent prices have fallen 20% to less than $55 a barrel: “Before Covid-19 came along, the market was already nervous in anticipation of a supply overhang of 1 [million barrels a day] in the first half of 2020 due to continued expansion in the US, Brazil, Canada, and Norway. Even threats to security of supply, e.g. tension in Iraq, a 1 [million barrel a day] fall in Libyan oil production, and force majeure declared for some Nigerian cargoes, had little impact on prices. Now that the demand outlook has weakened, prices have moved significantly down.”
Chinese demand is critical to global oil markets. About three-quarters of global demand growth for crude oil last year came from China, according to the IEA. The uncertainty surrounding the spread of Covid-19 and how long the outbreak will last are more worrisome to producers and traders than the actual number of barrels. As of early Thursday, nearly 60,000 cases of the Covid-19 have been reported in China and nearly 1,400 people have died.
The world’s supply of oil declined by 800,000 barrels a day in January to 100.5 million barrels, but total output was roughly the same as in January 2019 because the 2.1 million daily barrels taken out by OPEC+ were offset by an equal rise in production from non-OPEC producers like the United States. Demand for OPEC crude drops by 1.7 million barrels a day to 27.2 million barrels in the first quarter of this year, well below the cartel’s January production of 28.86 million barrels a day.
Estimates of Chinese refinery runs for the first quarter have been cut by 1.1 million barrels a day and are now expected to contract by 500,000 barrels year over year. As a result, global refinery runs are forecast to expand by just 700,000 barrels a day in 2020.
While the Covid-19 outbreak is justly worrying, it is unlikely to become one of the worst outbreaks of all time. In fact, at least 12,000 Americans are estimated to have died so far this flu season from other flu viruses.
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