⇑⇓ China Oil Demand ⇓⇑
Executives at some of the country’s largest refineries expect that nationwide demand will fall by a staggering 3.2m barrels a day in February from last year — a drop equivalent to more than 3 per cent of global consumption.
Oil prices have already crashed on expectations of plunging demand as the Chinese authorities quarantined cities, restricted air and road travel, and extended factory closures following the lunar new year holiday.
But the projections of senior executives in China — the world’s top oil importer — are likely to undermine market confidence further.
Chinese oil demand in February 2019 was just under 13m barrels a day, according to the International Energy Agency.
Opec countries and allies including Russia are scrambling to thrash out a response to a demand shock that could rival the drop in consumption witnessed at the nadir of the global financial crisis in 2008.
The oil major BP warned this week that the coronavirus outbreak could cut global oil demand by 300,000-500,000 barrels a day on average this year.
Brent crude, the international benchmark, has dropped more than 20 per cent since early January, falling below $55 a barrel earlier this week. It rebounded slightly on Wednesday amid hopes that a treatment for the virus would be found.
Chinese refiners, which process crude to create fuels such as petrol and diesel, are facing a big hit to sales as Beijing struggles to control the spread of the virus.
“The epidemic has dealt a huge blow to our business,” said one executive at a Chinese refinery, who asked not to be identified because of the sensitivity of the issue.
An executive at another refinery said that if the spread of the virus peaked in the coming weeks, China’s oil demand could remain at least 10 per cent lower in March than a year ago.
“We are highly likely to see a 3-4m b/d impact [this month] when you consider the economy has virtually ground to a halt,” said Michal Meidan at the Oxford Institute for Energy Studies.
“Industrial activity is down, passenger movement is down 70 per cent, freight movement is down 50 per cent. The timing question is key. We know for sure there is an effective standstill for two weeks at least.”
If China can quickly contain the spread of the virus, less dramatic forecasts about the demand hit are more likely to prove correct. Chevron said last week it saw a hit of 200,000 b/d on average for the year.
The Opec grouping is considering calling an emergency meeting to decide on the next steps to stop oil prices falling further. Talks are ongoing about whether they need to cut production by 500,000 b/d or more but no decision has yet been made.
Independent Chinese refiners have been particularly hard hit, cutting crude processing rates by at least half, one of the executives said.
They said daily sales of products such as fuel oil and asphalt have dropped by 90 per cent since the end of January, as logistics have been hampered by road restrictions. This has prompted inventories to rise by more than 50 per cent and put pressure on cash flows.
The country’s gasoline and diesel consumption fell almost two-thirds during the new year holiday from a year earlier, said another executive.
The average capacity utilisation rate among independent refineries in Shandong — a centre of the refining trade — has fallen to between 40 per cent and 50 per cent, a historical low, two of the executives said.
“Everyone is waiting for the turning point but no one knows when,” said a refinery executive.