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Oil price outlook: China and OPEC dimensions
Strategy/Gold/Oil
DBS Group Research March 3, 2020
30 slowed considerably in the wake of the COVID-
Suvro Sarkar 19 virus outbreak, that has claimed more than
Equity Analyst
2,000 lives in China already. Though we expect
the virus outbreak to peak out by end of
February 2020 and decline intensity over the
next few months, normalcy will likely only be
restored in the second half of 2020, in our base
case scenario.
Taking this into account, we revise down our
Please direct distribution queries to Violet overall 2020 oil demand growth projection from
Lee +65 68785281
[email protected] 1.0mmbpd to just 0.5mmbpd. Supply growth
should also be slower than previously
• Oil prices expected to remain subdued in estimated at around 0.7mmbpd, with further
near term as demand is impacted by cuts expected from Saudi, outages in Libya, and
COVID-19 outbreak in 1H-2020
slower growth from US shale in response to
• We revise down our 2020 average Brent lower oil prices. However, inventories are now
crude oil price forecast to US$57-62/bbl likely to continue to build throughout 2020/21
under base case scenario timeframe, putting downward pressure on oil
prices even when activity returns to pre-virus
• In the unlikely bear case scenario of virus
becoming a global pandemic, oil prices levels. Under our base case scenario, we now
could fall further towards US$40/bbl forecast oil prices to average between US$57-
62/bbl in 2020. For 2021, we expect a slightly
• OPEC’s ability to cut supplies further higher average of between US$60-65/bbl.
remains limited in our view
Global oil inventory levels likely to
remain in upward trajectory
3,200 500.0
Oil prices should remain muted in 1H-2020 3,100 400.0
3,000
300.0
After a strong start to the year amidst 2,900
geopolitical flare ups in Iran and other parts of 200.0
2,800
the Middle East, Brent crude oil prices have 2,700
100.0
retreated by around 30% from the early 2020 0.0
2,600
peak of US$69/bbl to around US$50/bbl levels
2,500 -100.0
as we write, averaging around US$60/bbl YTD in
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
2020. This is mainly due to the sharp fall in oil
demand from China, where provinces remain in Total OECD Industry Stock (mmbbls) (LHS)
lock down and industrial and travel activity has OECD Stocks vs. 5-yr avg (mmbbls) (RHS)
Source: International Energy Agency, DBS Bank
Refer to important disclosures at the end of this report.
Oil price outlook: China and OPEC dimensions March 3, 2020
Chinese oil demand to be hit significantly in negative, and oil prices could crash to around
1Q2020. If we look back at the SARS crisis in US$40/bbl levels in that bear case scenario.
2003, Chinese oil demand had been hit by China's oil demand breakdown by sector
around 10% in one quarter – 2Q2003 – when
the infections had peaked. This time around,
9%
with stricter regulations on travel and Transportation
6%
quarantine measures, coupled with Chinese Petrochemical
8%
New Year lull in activity getting extended, we
Industrial
believe the demand impact could be closer to 51%
11% Construction
20% of Chinese demand, or around 3.0mmbpd.
Jet fuel and petrol/ diesel demand would be Agriculture
hurt the most, in addition to some industrial 16%
Others
demand. However, this peak demand
destruction would likely be for only around 1
month, and the full 1Q average demand impact
Source: Sinopec, DBS Bank
would be closer to 1.5mmbpd (with refined oil
China's oil demand breakdown by product
products demand impact alone exceeding
1.0mmbpd, refer to Appendix), and another
Diesel
0.5mmbpd average demand impact in 2Q20,
leading to a full year demand impact of around 26% Gasoline
31%
0.5mmbpd by our estimates. Other light
distillates
The overall demand impact will be likely Jet fuel
moderated by a couple of factors, as China i) 4% Fuel oil
will try to capitalise on the low crude oil price 22%
7%
Others
environment to shore up its strategic 10%
petroleum reserves, and ii) will increase imports
of US crude oil to keep its end of the bargain of
the phase l trade deal (US crude imports ranged Source: Sinopec, DBS Bank
between 0.2-0.4mmbpd prior to the OPEC+ will try to tighten supplies further, but
implementation of tariffs; but China would how far can they go? To recap, OPEC and allies
need to continue importing crude oil from other had decided to cut production by around
countries as well as its refineries prefer heavier 0.5mmbpd from January 2020, but it seems
grades than the lighter shale oil). they would need to do more to keep oil prices
above US$60/bbl levels. Current OPEC supply
If the virus spreads materially in other parts of levels are being additionally moderated by
the world though – and we are starting to see outages in Libya owing to civil war, in addition
pockets of concern in countries like South to existing sanctions issues in Iran and
Korea, Iran and Italy – then global oil demand Venezuela, but that has not had much impact
growth in 2020 could be closer to zero or even on the oil markets so far during the virus
outbreak in China. The OPEC joint ministerial
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Oil price outlook: China and OPEC dimensions March 3, 2020
monitoring committee recently met to discuss
OPEC supply cuts not moving the
the impact of COVID-19 virus on oil demand and market
34
in a recent report, lowered 2020 global oil
Thousands
33 OPEC oil production (mmbpd)
demand expectations by 0.23mmbpd to
32
0.99mmbpd (still too high by our estimates),
31
likely to reinforce the bid to lower production
30
levels by another 0.5mmbpd in the next OPEC+
29
meeting scheduled for early March 2020. But it
28
seems unlikely that Russia will be on board for
27
further cuts and Saudi alone has to take up most
26
of the burden again to balance oil markets,
25
which may not be sustainable. We believe
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jan-14
Jan-15
Jan-16
Jan-18
Jan-20
Jan-17
Jan-19
supply side issues will in any case have limited
impact on oil price in near term and oil prices Source: Bloomberg, DBS Bank
can only improve in 2H-2020, as and when
demand trends start to normalise.
Appendix 1. Estimates of COVID-19 impact on refined oil products demand in China in 1H-2020
Estimated Estimated
change in change in
Demand in demand in Demand in demand in
Refined oil 1Q2019 1Q2020 2Q2019 2Q2020
product (mmbpd) (mmbpd) (mmbpd) (mmbpd) Rationale
Road passenger volume remains 75% below historical
normal levels as at 23-Feb, while traffic congestion data
across major cities is still significantly lower compared to
-0.3 -0.1
Gasoline 3.1 3 2019, with congestion levels down by 50% y-o-y on
(-10% y-o-y) (-3% y-o-y)
average. Demand should pick up with an easing of traffic
restrictions, as people avoid public transportation and opt
for car transportation.
Industrial activity will be adversely impacted by the
extended Chinese New Year holiday and the disruption in
-0.4 -0.15 transportation and supply chain networks. However, we
Diesel 3.3 3.1
(-12% y-o-y) (-5% y-o-y) are already starting to see reports on workers returning to
factories, and believe that operations will start to
normalise, albeit at a gradual pace.
Jet fuel demand will certainly be the most impacted by
COVID-19. Air passenger volume continues to be
-0.3 -0.15
Jet fuel 0.9 0.9 depressed, down by 82% y-o-y as at 23th Feb, and will take
(-33% y-o-y) (-16% y-o-y)
time to stabilise as strict travel restrictions will likely
persist till the end of 1Q2020.
Downstream petrochemical companies have cut operating
rates in response to ailing demand, while household and
commercial demand, which accounts for 50% of China’s
Naphtha and -0.15
1.7 1.7 nm LPG consumption will be affected by logistical bottlenecks
LPG (-9% y-o-y)
and restaurant closures. However, demand should be
more resilient relative to transportation fuels, and is
expected to stage a quicker turnaround in 2Q2020.
Source: DBS Bank estimates
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Oil price outlook: China and OPEC dimensions March 3, 2020
Appendix 2: Historical implied crude oil storage in China
mmbpd mmbpd
16.0 China actively increased crude oil imports for 2.0
14.0 storage amid the low oil price environment
between 2015-2017, and increased imports again 1.5
12.0 in 2019 as trade tensions with the US flared
10.0 1.0
8.0
6.0 0.5
4.0
0.0
2.0
0.0 -0.5
Mar-10
Mar-12
Mar-14
Mar-16
Mar-11
Mar-13
Mar-15
Mar-17
Mar-18
Mar-19
Sep-10
Sep-15
Sep-17
Sep-19
Sep-11
Sep-12
Sep-13
Sep-14
Sep-16
Sep-18
Apparent consumption (LHS) Crude oil processed (LHS) Implied storage (RHS)
Source: Bloomberg, DBS Bank
Quarterly average oil price forecast – DBS
(US$ per barrel) 1Q20F 2Q20F 3Q20F 4Q20F 1Q21F 2Q21F 3Q21F 4Q21F
Average Brent crude
56.5 57.5 63.5 64 59.5 57.5 64.5 63.5
oil price
Average WTI crude
51.0 52.5 58.5 59 54.5 52.5 59.5 58.5
oil price
Source: DBS Bank
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Oil price outlook: China and OPEC dimensions March 3, 2020
Group Research
Economics & Macro Strategy
Taimur Baig, Ph.D.
Chief Economist - G3 & Asia
+65 6878-9548
[email protected]Chang Wei Liang Radhika Rao
Strategist Economist – Eurozone, India, & Thailand
+65 6878-2072
[email protected] +65 6878-5282
[email protected]Nathan Chow Irvin Seah
Strategist - China & Hong Kong Economist - Singapore, Malaysia, & Vietnam
+852 3668-5693
[email protected] +65 6878-6727
[email protected]Eugene Leow Samuel Tse
Rates Strategist - G3 & Asia Economist - China & Hong Kong
+65 6878-2842
[email protected] +852 3668-5694
[email protected]Chris Leung Duncan Tan
Economist - China & Hong Kong FX and Rates Strategist - Asean
+852 3668-5694
[email protected] +65 6878-2140
[email protected]Ma Tieying, CFA Philip Wee
Economist - Japan, South Korea, & Taiwan FX Strategist - G3 & Asia
+65 6878-2408
[email protected] +65 6878-4033
[email protected] Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations)
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