Demand shocks to dominate global oil market in 2020

The global oil market’s reaction to the emergence of the coronavirus has been large and swift. Oil prices lost nearly 20 percent of their value between late January and early February, highlighting latent market fears about falling global oil demand in 2020. China alone contributes some 30 percent of new oil demand each year, and more broadly, Asia contributes about 50 percent of new demand. The coronavirus’s ultimate impact on economic growth remains unclear. Based on scientific research around the virus and the speed of the authorities’ response, The EIU expects the virus to be broadly contained by March- end and eradicated during the second quarter.

Cailin Birch, Global Economist at The Economist Intelligence Unit, says, “This implies a major hit to economic growth in China and the rest of Asia in the first quarter, as passenger travel, industrial production, goods trade volumes, and consumer spending are all negatively impacted by quarantines, factory closures and the downturn in market sentiment. However, we believe that the Chinese government’s strong stimulus measures will allow for a rebound in economic growth from the third quarter as some pent-up consumer demand is released. Overall, we have revised down our forecast for China’s real GDP growth in 2020 to 5.4 percent (5.9 percent previously).”

Market fears about falling oil demand are not misplaced, but they have been exaggerated by the outbreak of the coronavirus and the resulting economic uncertainty. The EIU has revised down its forecast for China’s annual oil demand growth in 2020 to 2.5 percent (3 percent previously). This is a big drop compared with China’s average demand growth of just under 4 percent per year in 2016-19.

According to the real-time vessel data collected by CargoMetrics and published in The EIU’s Oil Adequacy Index, seaborne crude oil exports from OPEC countries declined in every month but one in the second half of 2019, as the bloc has adjusted to the more tepid demand outlook for 2020. The largest declines took place in November (-3.9 percent month on month) and December (-1.7 percent as OPEC member countries prepared to implement a new round of production cuts.

Iran and Russia remain wildcards in 2020. Iran’s crude oil shipments have surged in late January and February, which may represent some stockpiling by China — one of Iran’s only two remaining buyers — while prices are low. Russia’s crude oil shipments have eased back, but not to the same degree that Saudi Arabia’s have done. If Russia refuses to comply with the further production cuts proposed by OPEC in February, this could sink oil prices again.