Second Wave Coronavirus Lockdown: Oil Demand Weakens
Oil traders and economists are taking stock of the demand that will be taken off the international oil market as Germany, France and, lately, the United Kingdom reimpose lockdowns to control the surge of the new coronavirus infections. United Kingdom Prime Minister, Boris Johnson said on Saturday that the country will enter a second phase lockdown on Thursday 4th November to prevent rising infection overwhelming the capacity of the National Health Service.
As second wave lockdown spreads, it is awakening memories of the initial lockdown which saw 25% of demand slashed off the international oil market, triggering prices of Brent Crude oil to fall to as low as $20. Brent crude, the international benchmark, weakened by 10 per cent last week to slightly over $37 per barrel.
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But traders and economists agree that second wave lockdowns will not impact demand as much as the first lockdown because they are neither as universal nor are the restrictions on movement as comprehensive as during the initial lockdown. In his speech to announce the lockdown, Boris Johnson mentioned only three European countries – France, Germany and Belgium – that have reimposed lockdowns.
However, chief economist at Trafigura, one of the biggest global oil dealers, Saad Raim told the Financial Times that the blow to consumption would still be significant.
“The trajectory of restrictions is clear — it’s likely to get worse before it gets better,” Raim added.
Oil demand in Europe including in Russia was in the neighbourhood of 20 million barrels per day (bpd) or 20 per cent of the world’s total before the pandemic struck. The figure plunged to as low as 14 million bpd in April before rising to 18 to 19 million bpd by October, he said.
“For November, traders really need to start calculating that level will now fall back to 17-18m b/d.”
OPEC, the oil producer cartel, was already predicting that global oil demand would drop 10 per cent this year, averaging 90 million bpd but had foretold it would rally to approximately 95 million bpd over the northern hemisphere.
The outlook is now threatened, latest forecasts showed. Rystad Energy calculates that Germany and France – which usually consume around 4 million barrels of oil per day between them – might see 1.7 million barrels per day of consumption disappear in November.
“The market seems to have taken for granted that life during the third quarter was the new normal. The measures that we are seeing right now are a wake-up call.”
In the United Kingdom as well as Germany and France, schools are remaining open and people who cannot work from home, manufacturing and construction sector workers, are allowed to work on site. Combined with parents making school runs, commuting by workers in these two big sectors will remain significant demand for fuel.
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According to the Financial Times report, Energy Aspects, a consultancy, informed its clients last week that while they were cutting estimate for European demand for oil by only 600,000 bpd in the fourth quarter while paring down their global down estimate for the first quarter of 2021 by 1.7 million bpd. The review was premised on the anticipation that other European and North American nations would ultimately follow suit and impose .
“You will see parts of Europe and the US follow France and Germany with stricter measures, almost certainly,” said Amrita Sen at Energy Aspects. “And we expect that will last through at least until the spring.”
Escalating coronavirus cases in the US are similarly expected to have a secondary effect on oil demand, even if several states do not yet face stricter restrictions.
In much of the world people are eager for a return to their usual lives and there has been a resistance to lockdown measures just as governments have been reluctant to reimpose them due to their heavy economic costs. But confronted with evidence of rising infections, Governments have had little choice but to once again impose restrictions on movement. Citizens will also start to cut all but the most necessary trips as evidence of rising infections is seen amongst family and friends.
