The coronavirus outbreak, which has killed nearly 1,700 persons across the world and brought China’s economy to a grinding halt, may extend some marginal relief to Indian household budgets. With Chinese oil demand crashing after the outbreak, the International Energy Agency (IEA) believes that global oil consumption is set to contract for the first time in a decade. This is expected to keep crude oil prices and, in turn, retail petrol and diesel prices much lower than the previous year’s averages.
According to the IEA’s first demand forecast of the year, global oil consumption growth is expected to be lower by 365,000 barrels per day (bpd) during 2020 calender year to just 825,000 bpd. This will be the lowest demand growth recorded since the global financial crisis came to an end in 2011. In fact, the impact is likely to be much more severe during the January to June of this year, with the virus expected to reduce world oil demand by 1.1 million bpd in the first three months and by 345,000 bpd between April and June.
“Before the outbreak of Covid-19, [China] was expected to drive over a third of oil consumption growth in 2020, but now we think it will be less than a fifth,” the IEA said. Overall oil demand during the current year is now forecast at 100.97 million bpd, 480,000 bpd lower than the IEA’s earlier estimate.
The sharply lower demand growth forecasts are set to turn advantageous to Indian consumers, since petrol and diesel is priced according to international benchmarks which have already fallen significantly. From a high of `76.01 per litre on January 11, petrol prices had fallen rapidly to just `71.94 in New Delhi on Sunday, while diesel rates have gone from `69.17 to `64.77 per litre during the same period.
Lower retail fuel prices have a cascading impact on prices across a wide range of products — from food articles to industrial components — since transportation costs account for a significant portion of any manufacturing supply chain. The fall in prices come in the nick of time for India, where largely subdued retail inflation has started to shoot up. For instance, January retail inflation has crossed the RBI’s targeted comfort zone of 2-6 per cent for the first time in years, printing at over seven per cent.
Also, how crude oil prices move will depend on the supply cuts effected by the world’s largest oil carter: the Organisation of Petroleum Exporting Countries (OPEC). While a committee has recommended that the cartel cut supply by 600,000 bpd, analysts believe this will be insufficient to push prices up significantly.
“Even though the chaos unfolding in Libya has wiped out most of its oil production, and even if OPEC’s output cuts are fully applied, they will not be enough to fill the demand gap now exacerbated by the coronavirus,” said Bjørnar Tonhaugen, Head of Oil Markets, Rystad Energy.
Oil consumption growth to dip globally
Global oil consumption growth is expected to be lower by 365,000 barrels per day (bpd) during 2020 calender year to just 825,000 bpd. This will be the lowest demand growth recorded since the global financial crisis came to an end in 2011.