The Bank of Korea Says "Global Oil Demand Slowdown May Widen More Than Expected"

[Asia Economy Reporter Kim Eunbyeol] Considering the spread speed of the novel coronavirus infection (COVID-19), the Bank of Korea stated that the slowdown in global oil demand could expand more than expected.

On the 16th, the Bank of Korea said in the 'Overseas Economic Focus' report, "Due to concerns about the slowdown in oil demand caused by the spread of COVID-19, international oil prices have continued to decline since late January."

The price of Dubai crude oil showed a continuous downward trend, falling from $64.4 per barrel on the 20th of last month to $57.6 on the 31st, and $53.3 on the 11th.

The Bank of Korea explained, "Major institutions expected that the reduction in travel due to the spread of COVID-19, as well as the slowdown in the Chinese and global economies, would negatively impact global oil demand."

Some investment banks (IBs), including JP Morgan, lowered their global oil demand forecast for the first quarter of this year to 500,000 barrels per day. Considering that before the COVID-19 outbreak, in the first quarter of last year, the oil demand forecast was estimated at 1.15 million barrels per day, this represents a downward revision of 650,000 barrels.

As preference for safe assets strengthened, investment sentiment toward crude oil futures, which are perceived as risky assets, also weakened. The net non-commercial long positions for West Texas Intermediate (WTI) crude oil on the New York Mercantile Exchange (NYMEX) decreased from 570 million barrels on the 7th of last month to 400 million barrels on the 4th of this month.

The Bank of Korea stated, "For the time being, international oil prices are likely to experience increased volatility depending on the extent of COVID-19 spread, whether major oil-producing countries implement additional production cuts, and geopolitical risks such as the Libyan civil war." It also pointed out, "Unlike during the spread of Severe Acute Respiratory Syndrome (SARS) in 2003, considering the increase in oil consumption due to China's economic growth so far, the possibility that the slowdown in global oil demand may expand more than expected cannot be ruled out."

Furthermore, on the supply side, although OPEC member countries such as Saudi Arabia want additional production cuts, there is uncertainty regarding production cuts as Russia, a major OPEC+ country, maintains a cautious stance, the Bank of Korea added.