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Vienna Alliance Wavers in Face of Coronavirus Threat

Vienna Alliance Wavers in Face of Coronavirus Threat

Roger Diwan, vice president, financial services, IHS Markit

February 11, 2020



  • For China, a return to normal economic activity is not yet in sight
  • IHS Markit expects 1Q2020 Chinese refined product demand to be down by around 1.2 MMb/d vs. 1Q2019 levels. That is compared to a pre-outbreak forecast of around 0.5 MMb/d of growth
  • Signs do point to a market that seems to expect a sharp recovery once the outbreak is contained
  • OPEC’s core producers are likely to see a significant hit in nominations from Chinese buyers in the coming months. The big question is if they can get the Vienna Alliance to share the burden and help support prices
  • Libya is the wild card hanging over all these calculations. General Khalifa Haftar’s oil export blockade there is entering its fourth week and supply has dropped around 1.0 MMb/d to 182,000 b/d.

Back to work? This week was supposed to mark a return to something like normal for China. But even after a month of widespread quarantines and travel bans, the data doesn’t yet indicate a sustained slowdown in the outbreak. The number of cases doubled over the last week and topped 40,000 over the weekend, while the number of deaths has now exceeded the SARS pandemic. Many large companies in China have told workers to remain at home, quarantines for provinces at the center of the epidemic are still in place, and major manufacturers say their factories remain closed or are running low on manpower. Some areas of the country less effected by the epidemic are returning to work, but a return to normal isn’t yet in sight.  

Oil demand shock deepens. IHS Markit currently expects Chinese refined product demand to contract by as much as 2.9 MMb/d year on year in February, compared to a pre-outbreak expectation of around 0.4 MMb/d of growth. 

Beyond February, the downside impact on demand is tethered to the spread of the virus and the Chinese government’s response to it. For now, we see product demand falling by ~0.8 MMb/d year on year in March and coming in about flat in April on a y-o-y basis before returning to the previously expected trend in May.

Taken together, we expect 1Q2020 demand to be down by around 1.2 MMb/d vs. 1Q2019 levels, compared to a pre-outbreak forecast of around 0.5 MMb/d of growth. All of this assumes a return to relative normal in the next couple weeks and is subject to revision as events unfold. 

Prices are reflecting a fast-loosening market. The forward curve flipped into a shallow contango last week and front month prices are down around 20% since the start of the outbreak, with Brazilian, West African and Russian crudes—all popular with independent refiners in Shandong—under particular pressure. Money managers continued selling out of their long positions last week, unloading around 55 million barrels, the heaviest week of selling since the outbreak started to hit oil markets in early January. However, short building has been relatively modest, with only around 4 MMbbl in new short positions added – bringing the total to 87.6 MMbbl, around where the market was last November. This along with a rapid tightening in calendar spreads over the last week points to a market that seems to expect a sharp recovery once the outbreak is contained.

“The potential for a rapid downdraft in demand in the first and second quarters followed by a quick return to normal has put OPEC-plus producers in a bind…. OPEC’s core producers are likely to see a significant hit in nominations from Chinese buyers in the coming months as the demand shock works its way through the market, and the big question is if they can get the Vienna Alliance to share the burden and help support prices. – Roger Diwan, vice president financial services, IHS Markit

Vienna Alliance’s dilemma. The potential for a rapid downdraft in demand in the first and second quarters followed by a quick return to normal has put OPEC-plus producers in a bind. The group’s Joint Technical Committee last week recommended extending the existing supply cuts through the end of the year, with an additional 600,000 b/d reduction in the second quarter to respond to the China demand slowdown. The Saudis, who are likely to see a sharp reduction in demand from China anyway, want a show of force to reassure markets given the sell off. Russia, however, appears reluctant to move proactively given the uncertainty around the slowdown and prospect for a quick recovery. We have seen this pattern before. Russia has often taken an initial skeptical stance toward a proposed cut, only to come around in the end. Regardless, OPEC’s core producers are likely to see a significant hit in nominations from Chinese buyers in the coming months as the demand shock works its way through the market, and the big question is if they can get the Vienna Alliance to share the burden and help support prices.

The 1.0 MMb/d Libyan wildcard. Hanging over all these calculations is the highly uncertain disruption to Libyan oil supply. General Khalifa Haftar’s oil export blockade is entering its fourth week and supply has dropped around 1.0 MMb/d to 182,000 b/d. For now, diplomatic initiatives that would end the blockade remain stalled, with little coming out of UN-brokered talks between the warring sides over the weekend. However, the talks remain ongoing and the next best potential off-ramp for the crisis is likely another round of discussions slated for 18 February. We believe that ultimately Haftar needs the revenues from oil sales as much as the Tripoli government he is trying to starve, making an end to the blockade likely sooner rather than later. Though the timing is impossible to predict, it is also vital to oil markets. If 1.0 MMb/d of Libyan production were to come back while the coronavirus outbreak is still in full force, it would trigger another significant leg down in prices.

Jeff R. Marn
Director, Public Relations
Phone: 202 463 8213 | Mobile: 202 560 0776
jeff.marn@ihsmarkit.com
press@ihsmarkit.com

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