Demand for Crude Oil & Distillate Products Down: Is China to blame?

EIA cuts the Global Demand Growth on Coronavirus

U.S. EIA (Energy Information Administration) cut down on the global liquid fuels demand will average 101.7 million barrels per day in 2020, 378,000 barrels per day less than what was forecast in January 2020.

The forecasts have been lowered following the lower than normal heating fuel demand thanks to unexpected higher temperatures in Central and South Asia during winter and slowing economic conditions of China & most importantly, the Coronavirus outbreak.

Crude Oil Prices

The Crude prices continue to hold on post the January drop, and the previous week was the first weekly gain in 2020, where we saw the Brent and the U.S. crude benchmarks gaining 3-4.5%. The economic impact of Coronavirus is anticipated to be short-lived, the market expects the first quarter of 2020 to see some demand destruction, but the second quarter would possibly experience a "V-shaped" recovery pattern.

India Russia hitting off on the Oil Deal

India, the third-largest energy consumer, is speculated to be in talks with Russia for a long term mega oil deal, ahead of the U.S. President Donald Trump's visit to India.

India imports almost 80% of the crude oil for its domestic needs and heavily depends on the middle east oil-rich countries for the imports. India in the past faced severe issues with supply disruptions following U.S. sanctions on Iran and seeks multiple vendors to feed its the demand of the energy monger.

Saudi Arabia & Russia, through their respective National Oil Companies ADNOC-Saudi Aramco and Rosneft respectively, remain bullish on the Indian market and are expected to come up with their downstream facilities in the country.

Has the demand really decreased?

Road Transport Demand Decline- Light & Middle Distillate

As per the Chinese Ministry of Transportation, the air passenger slumped by 36.5% y-o-y to 37 million for the 10 Jan-Feb 30 days period. The road transport turnover for the period fell by 44.1% y-o-y to 1.12 billion in January on a one-person per 100 kilometres basis as posted by the ministry on its official WeChat platform.

* Estimated as per Kalkine Assumptions

Source: Kalkine Research & MoT China

As per Kalkine estimates, the decreased fuel demand would range from 12.85 Million barrels to 51.42 Million barrels of Diesel & Gasoline. A similar trend can be assumed from the decline in the aviation sector, even during the Chinese New Year celebrations.

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The further expectation for February is expected to be weak, following the travel restrictions and the declaration of Coronavirus as a global health emergency. Industry experts anticipate a decrease of almost 3 million barrels a day of Crude Oil in February due to Chinese demand decline.

EIA cuts down Q1,2020 demand Outlook

Source: EIA

The U.S. Energy Information Administration cut down the global petroleum & liquid fuel demand to 100.3 million barrels a day for the first quarter of 2020. As per the EIA estimates, the liquid fuel production stood at 101.78 million barrels a day and the consumption at 100.0 Million Barrels a day, during January.

The Q1 demand is anticipated to slip by 0.59% to 102.323 million barrels per day. EIA expects the demand to increase by 0.36% in the Q2 to 102.696 Million Barrels per day. The actual demand would depend on the time required to tackle the coronavirus issue.

OPEC Sings the same tune on Coronavirus, albeit a toned-down version

The Oil demand from China is expected to decline in 2020 majorly, due to lower economic activities. In January, OPEC crude oil production fell by 509,000 million barrels per day to 28.86 Million Barrels as per OPEC.

OECD recently, cut down the estimates for 2020, with the revised estimates for global oil demand at 100.73 Million barrels per day.

The recent outbreak of Coronavirus has put downward pressure on Chinese oil demand as the middle, and lower distillates are impacted adversely due to the sharp decline in the transportation activity.

Heavy Distillates

Also, for the heavy distillates, the demand has also decreased majorly due to the warmer than normal winter in the Central and South Asia, reducing the demand from heating sector.

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China, the second-largest fuel oil consumer, experienced the slump along with the largest consumer, Japan, due to the warmer season. Asphalt demand from China has also slumped following the halting of infrastructure construction.

Supply Cuts: The Saviour to the Crude Oil Prices

The subdued Asian demand has considerably declined the refining margins. Multiple Chinese refineries have planned to cut the oil requirements over the upcoming weeks, leading to an even bearish situation for the Asian crude price differentials.

Both Sinopec and PetroChina have declared supply cuts to their refineries and are operating them at a lower utilisation rate.

The upstream sector has taken notice of the situation, and a supply cut is expected from OPEC countries which would provide the much-needed strength to the global crude oil prices. Coronavirus and decreased Chinese demand are expected to fade away in the upcoming months.

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