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Flawed Demand Forecasts Drive Oil Prices Yet Virus' Economic Affect Unknown

By Ellen WaldCommoditiesFeb 13, 2020 05:38
ca.investing.com/analysis/flawed-demand-forecasts-drive-oil-prices-yet-virus-economic-affect-unknown-200433765
Flawed Demand Forecasts Drive Oil Prices Yet Virus' Economic Affect Unknown
By Ellen Wald   |  Feb 13, 2020 05:38
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No one knows how coronavirus will end up influencing the Chinese economy or oil demand.

One cause of this uncertainty: Sino society isn't open, and official information is largely controlled by the government, which has been known to manipulate the economic data it provides for political purposes. Our ignorance also stems from an inability to predict the results of the viral outbreak at this juncture, which has killed more than one thousand people, infected tens of thousands and spread to countries across the globe.

However, mid-way through the second month of 2020, institutions are beginning to issue revised oil demand forecasts for the year. It’s not clear what data or evidence they could possibly use to make these updates given the questions surrounding coronavirus.

Nevertheless, these reports alone—regardless of their accuracy—must be considered, because they move markets.

BP Cuts Oil Consumption Outlook

BP (NYSE:BP) was one of the first institutions to forecast the impact coronavirus would have on global oil demand. On Feb. 4, BP’s CFO said that he sees the global slowdown from coronavirus cutting the growth in global oil consumption by 300,000 to 500,000 bpd 2020.

Oil markets plunged sharply based on this forecast last week.

Crude Oil WTI Futures Weekly Chart
Crude Oil WTI Futures Weekly Chart

More Doom And Gloom Forecasts?

Rystad Energy, an independent energy research firm based in Norway, released its prediction on Feb. 11. In December, Rystad projected that global oil demand would increase by 1.1 million bpd. Now, it believes demand will only grow by 820,000 bpd.

However, in the same statement, Rystad admitted that the results could be much worse, cutting demand growth to only 650,000 bpd.

Traders shouldn’t be fooled by the doom and gloom language Rystad employed in its press release. This forecast—which amounts to a drop in demand of between 280,000 to 450,000 bpd in 2020—is actually quite similar to BP’s forecast from a week earlier.

The EIA (U.S. Energy Information Administration) revised its oil demand growth forecast on Feb. 11 with a prediction that coronavirus would decrease demand growth by 300,000 bpd in 2020, now seeing global oil demand increasing by 1 million bpd in 2020, still higher than Rystad’s amended numbers.

Opec Weighs In, Brent Reacts

OPEC issued a updated forecast on Feb. 12 that sees less of an impact from coronavirus. The Organization of Petroleum Exporting Countries projected that oil demand growth would only fall by 230,000 bpd due to coronavirus in 2020. This brings its forecast to 0.99 million bpd in 2020.

The market seemed to appreciate OPEC’s smaller revision this week, and the price of Brent jumped nearly 2% on this news. WTI increased about 1.5% as well.

Brent Oil Weekly Chart
Brent Oil Weekly Chart

The IEA, or International Energy Agency, plans to issue its revised demand forecast on Feb. 13, and traders should anticipate market moves based on the amount of demand destruction that the organization predicts.

The key points here are twofold: first, the market will react now as these amended demand forecasts are printed. Second, in the longer-term, no one knows the real impact this virus will have on oil demand.

Bottom Line

These forecasts are just predictions based on very little actual information. The director-general of the World Health Organization (WHO) admitted on Wednesday that even though the number of new, official cases of coronavirus in China appears to be stabilizing over the past week, the outbreak “could still go in any direction.”

In other words, the WHO cannot predict what’s going to happen in China or elsewhere. Therefore, how can BP, Rystad, EIA, OPEC or IEA?

Traders looking to understand the impact on oil markets and the direction prices might take should remember that in the short-term, revised forecasts are moving the markets, but the longer-term demand prediction in this situation is nearly impossible to foretell.

These groups are giving you their best guesses, but it's not a view into the future. In fact, given China’s opacity, the true extent of the virus’s influence on the global economy may only be revealed in retrospect.

Flawed Demand Forecasts Drive Oil Prices Yet Virus' Economic Affect Unknown
 

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Flawed Demand Forecasts Drive Oil Prices Yet Virus' Economic Affect Unknown

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