World oil demand likely to face largest fall ever in Q1
IHS Markit has projected that the first quarter of 2020 will see world oil demand drop by the largest volume in history, even greater than declines seen during 2009's financial crisis. The company states that a drop is likely due to the effect of China's response to COVID-19.
Chinese economic activity dropped significantly in February as the coronavirus spread and began to expand outside of China; because of that, IHS Markit suggests world oil demand for Q1 will be 3.8 million barrels per day lower than the previous year. That is a drop of 4.5 MMbd from previous estimates prior to the virus appearing, the largest recorded decline ever.
"This is a sudden, instant demand shock — and the scale of the decline is unprecedented," said Jim Burkhard, vice president and head of oil markets, IHS Markit.
In another surprise move, the US Federal Reserve announced a rate cut outside of a scheduled policy meeting for the first time since 2008, also to try and balance the effects of the virus.
Additional observations from the IHS Markit Crude Oil Market Service:
- Most of the demand decline is in China, but demand elsewhere, including Europe, Japan, South Korea, the Middle East, and North America, has been revised down.
- COVID-19 cases outside of China continue to accelerate, which means that the negative demand impact will continue into the second quarter.
- Demand for all refined products is negatively impacted, but especially for gasoline in China because of the steep decline in road travel as a result of government restrictions and for jet fuel due to flight cancellations within China and the long-haul routes to and from Asia. In China, commercial passenger trips by road, rail, air, and water were down 80 percent in February compared with a year ago.
- OPEC production is at a 17-year low and could drop even further as oil buyers cut purchases in March and April. But the decline in output is still less than the decline in demand, which means oil inventories are likely to experience a large increase, particularly in China and the Middle East, unless OPEC at its ministerial meeting later this week cuts production in a major way.
- It now appears likely that oil demand will be less than in 2019, even if there is a recovery in the second half of 2020.