Oil Looks Into Abyss as Virus Threatens Demand Contraction

(Bloomberg) -- Flights canceled in Europe, schools closed in Japan, towns quarantined in Italy and panic in California. The coronavirus crisis has gone global, and with it, its impact on energy demand.

For only the fourth time in almost 40 years, oil consumption may not grow at all in 2020, according to a growing minority of traders, investors and analysts. For OPEC, gathering in Vienna this week to discuss production policy, it's a nightmare scenario likely to force the cartel into deep output cuts.

“I see no growth in demand this year now the Coronavirus is everywhere,” said Doug King, a hedge fund investor who co-founded the Merchant Commodity Fund.

In interviews at the annual International Petroleum Week, a major oil-industry gathering in London last week, the mood darkened as outbreaks from Italy to Iran forced traders to re-evaluate the virus's impact on the global economy. Fewer journeys to work, canceled vacations and disrupted supply chains all mean reduced demand for fuel. Now, in-house analysts at oil companies and commodity houses are sketching out scenarios that include a global pandemic and a significant contraction in global crude consumption -- something that's extremely rare.

Oil extended losses into a seventh session on Monday as the accelerating spread of the virus across the globe intensified demand concerns. Futures in New York fell as much as 3.2%, after last week dropping the most since December 2008.

Read more: Humbled Saudis May Yet Clinch OPEC+ Deal as Virus Spreads

Since 1984, oil demand has grown every year barring three occasions: 2008 and 2009, during the global financial crisis, and in 1993 as the U.S. recovered from recession.

So far, the International Energy Agency anticipates oil consumption growth of about 800,000 barrels a day in 2020, a third less than forecast before the outbreak, and well below the 10-year average of 1.3 million barrels a day. But that outlook, based on containing the virus in China, was released on Feb. 13 and since then the crisis has taken a turn for the worse.

Commodity traders and oil companies have updated their internal forecasts since then, with some cutting 2020 demand growth to a range of 200,000 to 700,000 barrels a day, according to people familiar with the estimates. Further cuts are likely as the coronavirus spreads worldwide, the same people said, asking not to be named because the forecasts aren't public.

“The demand view is changing by the minute,” said Giovanni Serio, head of research at Vitol Group, the world's largest independent oil trader. “China has seen a small recovery, but activity, including traffic levels, remain below normal.”

In a sign of the magnitude of the economic impact of the coronavirus outbreak, China reported a record slump in manufacturing activity in February. The country's manufacturing purchasing managers' index plunged to 35.7 in February, falling below the mark set during the 2008-09 global financial crisis.

FGE, an oil consultancy, last week revised its 2020 oil demand growth forecast to virtually zero. “We could literally now be looking at potential oil demand loss globally of several million barrels a day for several months,” FGE Chairman Fereidun Fesharaki said.

Vitol has cut its demand growth forecast to 700,000 barrels a day in its most likely scenario, down from a pre-crisis view of 1.2 million barrels a day. But in a sign of the uncertainty, the trading house has also started modeling an alternative scenario which includes a global recession and a contraction in oil demand in 2020.

The fears about demand growth stagnating or even contracting have prompted hedge funds to buy $40 a barrel put options, contracts that give them the right to sell at a predetermined price and time, according to people familiar with the trades. Brent crude briefly fell below $50 a barrel on Friday, the lowest since 2018.

Lost Forever

The oil market is still hoping economic stimulus in China will revive demand in the second half of the year. But increasingly, traders believe any higher consumption then may not completely offset demand losses now. No matter how much cash Beijing pumps into the system, the loss of demand from, say, heating oil for schools this winter, or gasoline burnt driving into the office, can't be recovered.

Across Asia, the signs of falling demand are quickly spreading beyond China. In Japan, refiners are cutting processing rates, as the virus compounds the impact of warmer-than-usual weather. In Taiwan, petrochemical companies that produce the building blocks of plastics are also cutting rates. In Europe, some refineries are planning to start cutting processing as soon as this week, traders said.

In contrast to supply shocks, quickly measured by tracking pipeline flows or oil tankers leaving port, demand shocks are much harder to quantify. That makes betting on oil extremely difficult, and means wild gyrations in price.

--With assistance from Alfred Cang.

To contact the reporter on this story: Javier Blas in London at jblas3@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net, Emma Ross-Thomas

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