If you only read recent headlines, it’s difficult to be bullish about near-term oil prices and demand:
“Executives at some of China’s largest refineries expect nationwide demand will fall by a staggering 3.2 MMbbl/d in February – equivalent to more than 3% of global consumption.” Financial Times, Feb 5
“IEA cuts global demand growth for 2020 to a paltry 825,000 bbl/d, the lowest annual since 2011.” Javier Blas, Feb. 13
Market analysts are unanimous in their pessimism about the impact of the coronavirus outbreak on 1Q20 global oil demand, pointing to reduced traffic congestion (Figure 1), a drop in refinery runs and decreased crude imports. In fact, we have no real-time data on the amount of gasoline/diesel actually consumed in China, nor the extent to which the drop in refining runs represents an advance in seasonal maintenance. Nor have we seen much thoughtful discussion distinguishing a drop in crude imports from end-use consumption. Instead, a torrent of tweets and photographs of vacant streets are pushing the notion of a collapse in Chinese oil demand. For perspective, global oil demand grew a mere 880,000 bbl/d in 2019 Y/Y, but this didn’t warrant a peep on Twitter.
We agree that Chinese consumption likely has slumped appreciably in the past few weeks. However, nobody knows for certain by how much. Consensus expectations at present are that the virus is having, and will continue to have, a significant impact on oil demand and the Chinese and global economies for months to come. But the most recent data on infections shows the virus appears to be peaking (Figure 2). What if the consensus is wrong?
“As of Monday, February 17, more than 80% of the central state-owned enterprises’ roughly 20,000 manufacturing subsidiaries have resumed work, while 95% have resumed work in petroleum and petrochemicals, telecommunications, power grid and power generation, and transportation. In mining, steel equipment and manufacturing, more than 80% have resumed work.” – China Assets Supervision and Administration Commission, Feb. 17
“We believe that through hard work . . . we will still be able to achieve the economic and social development goals and tasks that we have set out.” President Xi Jinping, Feb. 17
Indeed, at time of writing, spot Brent has rallied towards $60/bbl – very much at odds with a headline-grabbing hypothesis of a 3 MMbbl/d collapse in Chinese oil demand this month. This may reflect a shift in sentiment towards demand recovering faster than anticipated.
Some pundits suggest the coronavirus is a challenge to President Xi’s rule. Rather, it could prove to be an opportunity. That is, once the virus is brought to heel, a rapid recovery in China’s economy, helped along by massive fiscal and monetary stimulus and forceful back-to-work measures, will bolster President Xi’s position both within China and the broader global community.
FIGURE 1 | Tracking the Impact of Cororavirus: Up to 60% Drop in Traffic Congestion in Some Chinese Cities
FIGURE 2 | Rate of New Infections Slowing Down?
Source | RSEG, John Hopkins CSSE