Running idle - China's appetite for oil has plunged, setting off alarm bells in oil producing countries. An emergency meeting of Opec and other suppliers could be called. File picture showing a worker under an oil well at China's Shengli oil field. Image Credit: EPA

(Bloomberg): Chinese oil demand has dropped by about three million barrels a day, or 20 per cent of total consumption, as the coronavirus squeezes the economy. The drop is probably the largest demand shock the oil market has suffered since the global financial crisis of 2008 to 2009, and the most sudden since the September 11 terror attacks.

China is the world’s largest oil importer, after surpassing the US in 2016, so any change in consumption has an outsize impact on the global energy market. The country consumes about 14 million barrels a day - equivalent to the combined needs of France, Germany, Italy, Spain, the UK, Japan and South Korea.

It could force the hand of OPEC, which is considering an emergency meeting to cut production and staunch the decline in prices.

Beijing has locked millions of people in quarantine and the New Year holiday has been extended. Flights have been canceled and authorities across the globe are trying to contain the virus’s spread. China’s central bank, seeking to avert a sell-off when markets open on Monday, is taking measures to boost liquidity.

The collapse in Chinese oil consumption is starting to reverberate across the global energy market, with sales of some crudes slowing to a crawl and benchmark prices in free-fall. Sales of Latin American oil cargoes to China came to a halt last week, while sales of West African crude, a traditional source for Chinese refineries, are also slower than usual, traders said.

Stocking up

Chinese refineries are storing unsold petroleum products such as gasoline and jet-fuel. But every day stockpiles are growing, and some refineries may soon reach their storage limits. If that were to happen, they would have to cut the amount of crude they process. One executive said that refinery runs were likely to be cut soon by 15-20 per cent.

Traditionally during the New Year holiday, gasoline and jet-fuel demand increase as hundred of millions go back home, while gasoil consumption drops as industrial activity slows.

The price of Brent, the global oil benchmark, has fallen 10 per cent since January 20. Beyond the headline price for Brent, every other indicator in the physical and derivatives market also points to a weakening market. So-called “time-spreads”, which measure the price difference between contracts for delivery at different times, have collapsed - an indication that short-term demand is expected to remain weak.

Emergency meeting

OPEC and its allies, which include Russia, are weighing their options to respond to the crisis and there have been discussions about calling an emergency meeting. Saudi Arabia is pressing for a gathering sooner than the one scheduled for March 5-6, though it has run into resistance from Russia.

For now, OPEC has called a technical meeting this week to assess the situation, and the Joint Technical Committee will report back to ministers.

According to consultants at Energy Aspects Ltd., OPEC is considering an informal proposal to deepen current production curbs by about 500,000 barrels a day. But there’s no consensus on the idea, which was floated by at least one country.

As OPEC and its partners are already in the midst of steep cuts, many analysts are skeptical on how much more they’re willing to do.

The most recent agreed reductions only came together after considerable diplomatic wrangling, and Saudi Arabia has already slashed production to the lowest since 2014. Russia, which has become the most important producer in the coalition alongside the kingdom, has typically taken some persuading to sign up to additional cuts. Still, if the alliance does agree to call early meeting, historic precedent suggests it will probably result in action.

“Nothing concentrates a producer’s mind more than the prospect of a crude oil price bust,” said Bob McNally, president of Rapidan Energy Group, and a former White House oil official under President George W. Bush.