This article initially appeared on S&P Global
Oil demand is set to contract in 2020 as the coronavirus outbreak widened to 72 countries outside China as of Wednesday, threatening to put more pressure on the global economy and fuel demand, according to two revised outlooks this week.
This is notable because oil demand has consistently increased every year for several decades, with a few exceptions like the early 1990s recession and the financial crisis of 2008-2009.
“Over the last week, the situation has worsened with outbreaks now in a number of additional countries,” Goldman Sachs energy research chief Damien Courvalin said in a report Tuesday.
Goldman Sachs cut its oil demand outlook to a 150,000 b/d contraction, from 550,000 b/d growth predicted in the previous forecast and 1.1 million b/d of growth predicted before the outbreak.
Courvalin said the latest revisions were entirely outside China given the bank’s aggressive cuts made initially to China’s oil demand growth, the sharp slowdown in new coronavirus cases in China and steady-but-slow signs of recovery in domestic activity.
Goldman Sachs expects a global oil demand loss of 2.1 million b/d in the first half of the year alone. It also slashed its oil price forecasts, expecting Brent to trough in April at $45/b before gradually recovering to $60/b by the end of the year. It earlier expected a $53/b trough and a recovery to $65/b.
Facts Global Energy said this week it expects average 2020 global oil demand to contract by 220,000 b/d, “with strong risks still on the downside … despite a major initiative now for a global economic stimulus.” Last month, FGE predicted unchanged oil demand for 2020.
FGE expects Q1 2020 demand to contract by 2.3 million b/d year on year, before only returning to year-on-year growth in Q3.
“The source of oil demand in its essence is very simple: producing things and moving things/people,” FGE said. “If, as is happening now, production lines slow down or even stand still and global trade and travel stops, oil demand stops growing as well.”
Growth still possible
Other analysts continue to predict oil demand will grow modestly in 2020, despite the virus outbreak.
S&P Global Platts Analytics expects global oil demand growth to “move away from the best-case scenario and come a step closer to our worst-case scenario of 320,000 b/d, though we are not there yet,” said Kang Wu, head of Asia analytics.
“Even though the virus’s spread appears to have peaked in China, what we have seen recently is an acceleration outside China,” Wu added.
Sarah Emerson, managing principal of ESAI Energy, said oil demand could bounce back in the second half of the year if coronavirus’ spread is brought under control in the new countries where it is starting to break out.
“In countries with modern, transparent health care, steps are being taken that should lessen the impact of the virus as it spreads in those countries,” she said. “Moreover, the public in most countries are now far more knowledgeable than the residents of Wuhan who were taken entirely by surprise.”
Emerson said, so far, she expects the demand destruction from coronavirus to fall somewhere between the impact seen from SARS in 2003 and the financial crisis of 2008-2009.
“SARS really hit demand hard in the second quarter of 2003, but as the virus’ spread was brought under control, demand bounced back with a vengeance,” Emerson said. “But if COVID-19 is more of an economic blow given the supply-chain impact, the international travel impact and the fact that the oil market relies heavily on Chinese demand growth, then 2008 may be a more representative example of demand destruction. Oil demand did not recover really until 2009.”
“I think COVID-19 is somewhere in between the two,” she added. “It is not as structural and ubiquitous a threat to the global banking system and thus the global economy as 2008 was, but it is also not as manageable as SARS.”
S&P Global Ratings said Tuesday that the global macro impact of coronavirus had doubled since mid-February and cut its 3.3% GDP growth baseline by 0.5 percentage points, assuming the epidemic subsides in Q2.
“The virus has now gone global,” Ratings said. “It is no longer just an issue for China and its closest economic partners, and no longer mainly a supply-chain issue. Both supply and demand effects are in play, and both are being amplified by tightening financial conditions.”
FGE said the coronavirus crisis can develop as either a short-term crisis with less damage to the global economy and a rebound in oil demand from Q3, or a long-term crisis that severely impacts global GDP with a prolonged oil demand recovery.
“Our current outlook is more similar to the short-lived price shock in 1990 rather than the global economic crisis a decade ago,” FGE said. “In order to become a longer demand shock, the impact on GDP would need to be more severe.”
ClearView Energy Partners said in a note this week that coronavirus will destroy oil demand in three ways: government shutdowns and travel restrictions, value-chain impacts from reduced economic activity, and less energy use by sick people.
To project the third category of direct impacts from the illness, ClearView modeled oil consumption in the top nine oil-consuming countries under scenarios of moderate to serious outbreaks. It estimated that average 2020 demand would fall by up to 48,000 b/d at a 5% infection rate in the nine countries and up to 191,000 b/d at a 20% infection rate.
“A worldwide pandemic is a demand killer,” said Kevin Book, ClearView managing director. “That’s not rocket science.”
But Book said at some point normal travel patterns will resume as governments lift restrictions and the public’s fear of travel subsides.
“The human mind risk-normalizes pretty quickly,” he said.