WASHINGTON — The coronavirus outbreak is threatening to cause a historic drop in global oil sales, potentially resulting in the first annual decline in demand since the financial crisis and recession of more than a decade ago.
Both the Wall Street investment bank Goldman Sachs and the research firm IHS Markit predicted as much this week with IHS forecasting crude demand will decline by 3.8 million barrels per day over the first three months of 2020, which would be the largest drop in history and another blow to Texas’ oil industry. The Norwegian consultancy Rystad issued its own dire forecast on Thursday, estimating that oil demand plunged by 4.6 million barrels a day in February.
“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 at IHS Markit.
The virus’s potential to upend global energy demand has roiled commodity markets. Oil settled at $46.78 a barrel Wednesday in New York, down 40 cents on the day. Oil is down more than 20 percent from the beginning of the year, when it was trading about $60 a barrel.
And with coronavirus now spreading to countries around the globe, fear is building that energy demand could fall much further. Flights are being canceled in Europe, while schools are closed in Japan and towns quarantined in Italy.
Today, OPEC and its allies are set to meet in Vienna to consider further cuts to production in another effort to lift prices.
Saudi Arabia is calling for a production cut of more than 1 million barrels a day to offset the impact of coronavirus on the global economy and energy consumption, but other leaders of the so-called OPEC+ group, which includes Russia, have yet to agree.
So far, the hit to demand mostly has come in China, where government officials have ordered residents in some regions off the road, crashing fuel demand to near zero, said Ann Louise Hittle, head oil market analyst at research firm Wood Mackenzie.
But it’s unclear whether such a demand hit would come in other countries, where governments don’t maintain the same degree of authority.
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“People literally couldn’t drive in Hubei (province in central China) unless they had permission,” Hittle said. “I don’t think we’re going to see that in northern Italy. It’s not like the government there can do that.”
While most everyone in the oil sector is predicting a sharp decline over the first three months of the year, there is disagreement over the degree and longevity of the slide. Wood Mackenzie, for example, forecasts demand will rebound and increase by 400,000 barrels per day during 2020.
And for now, many analysts are predicting the slump in demand will end over the next few months, as health officials bring the pandemic under control.
“We assume this peak impact applies to February and March before gradually subsiding to zero by the end of June,” said Pavel Molchanov, an analyst at Raymond James. “Obviously, the situation remains fluid, especially as it relates to impact outside Asia.”
The fear coronavirus is breeding is evident at OPEC headquarters in Vienna, where officials have barred journalists from entering out of fear of further spreading the virus. OPEC’s gatherings are typically major media events, as oil minsters from the Middle East and Russia trade quips on the world’s energy markets.
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For now the debate on how drastic a cut OPEC should make continues, with production already at a 17-year low, according to IHS Markit. On Tuesday, OPEC’s Joint Technical Committee suggested cutting supply an additional 600,000 to 1 million barrels a day during the second quarter, delegates said.
But there is concern that might not even be enough, with the possibility a lack of action could cause crude prices to resume last week’s decline — the steepest weekly drop since the 2008 financial crisis.
“The price seems to have stabilized because [investors] expect OPEC to do something,” Hittle said. “But if this goes on and (GDP takes a hit) it’s going to be a more severe impact on price.”
Bloomberg News contributed to this report.
james.osborne@chron.com
Twitter: @osborneja
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