Oil prices fell close to a three-month low on Friday, dragged down further by fears of weak demand.
The proximate driver is the coronavirus in China, which is raising concerns about a hit to the economy and slower oil demand growth. “One should be prepared for negative surprises when it comes to Chinese demand given that the government has now widened the coronavirus quarantine to ten cities in Hubei province with a total population of 30 million people,” Commerzbank said in a note. “The impact of this is all the greater because the restrictions are being imposed during the busiest travel season for the Chinese.”
The coronavirus could cut into demand by around 260,000 bpd and reduce oil prices by about $3 per barrel, according to a report from Goldman Sachs. However, in the days following the publication of that estimate, oil prices fell by even more than $3.
“The muted domestic demand, coupled with a marked rise in refinery capacities, is likely to cause Chinese exports of oil products to increase significantly further,” Commerzbank added. “Gasoline exports already grew by 27% year-on-year to 16.37 million tons in 2019, while diesel exports increased by 15% to 22 million tons.”
The investment bank added that oil demand was also “subdued” elsewhere in Asia, including in Japan and India. For instance, Japan’s average imports in 2019 fell below 3 million barrels per day (mb/d) for the first time since the 1980s.
The oil market is entering another slump, dashing the short-lived rally following the Phase 1 trade deal between the U.S. and China. The sour sentiment is all the more remarkable because Libya lost around 800,000 barrels per day in the last week, a huge slice of supply that went offline virtually overnight. And yet, crude prices continue to fall. “Such is the bearish pressure that a raft of ongoing crude supply outages are not gaining much traction,” JBC Energy wrote in a report. Iraq, Nigeria and Kazakhstan also saw some output go offline.
JBC went on to note that concerns about demand are not just limited to China. “Indeed we have mentioned a couple of times in recent reports the lack of price upside to diesel in Europe – the global middle distillate price setter – despite what appears to have been months of low domestic supply,” JBC said. Global inventories are on the rise, a reflection of ample supply. “Weekly stocks data at the global level has also started to show a pickup in both light and middle distillate stocks, with US inventories looking now at a much more ample seasonal level than over much of Q4.”
The renewed slide in prices once again puts pressure on OPEC+, restarting a familiar storyline. Saudi Arabia’s energy minister suggested that all options are on the table for the March meeting of OPEC+, seemingly opening the door to deeper production cuts. Other press reports suggested that OPEC+ may extend the cuts through the end of the year.
The chronic surplus is dragging the energy sector down into the dumps. The share prices for an array of shale companies declined sharply hard last week. Mark Papa’s Centennial Resource Development lost more than 20 percent on the week; SM Energy was down by 18 percent; Whiting Petroleum declined by 17 percent; and EOG Resources was off by 9 percent, just to name a few.
But it was the Appalachian shale drillers that really went through the wringer. Range Resources and Antero Resources each plunged by roughly 26 percent, while EQT – the largest shale gas producer in the country – lost more than 23 percent. All in a single week.
The slump could be temporary, especially since some of the downbeat sentiment can be attributed to the panic in China. “Once there is evidence that the outbreak is contained and thus economic disruption subsiding, sentiment on oil should improve, bringing prices back up,” Raymond James wrote in a note. “For now, the oil market seems to be assuming that the situation will get worse before it gets better.”