Oil consumption falling off the cliff

The world is witnessing the unexpected not just in terms of coronavirus (COVID 19) outbreak but also the lowest prices of crude oil in the last 17 years. Global crude is down about 40 per cent in March so far, and refiners are racing to reduce operations due to coronavirus pandemic and demand destruction as a result. Global oil demand is set to plunge by more than 10 percent from the average 100 million bpd as countries go on massive lockdowns.

Though Pakistan can benefit from falling oil prices as does any other oil importing country, the benefits may be short lived. The demand destruction is likely to outweigh the benefit of lower oil prices. The global pandemic will hit oil demand at home. Oil sales have already been on a downward trajectory for some time, and now coronavirus is ringing alarm bells for demand including that of POL consumption.

While numbers for March OMC sales were not available at the time of the writing, these have started falling as per market sources. Demand for fuel in transport, captive power plants, aviation and industry is likely to undergo significant slowdown due to efforts such as social distancing, implementation of work from home protocol by many organisation across the country, and aviation operation suspension for two weeks to control coronavirus. With partial or full lockdown eventually looming in, numbers will reduce further.

Refineries are likely to witness a further squeeze in margins, while OMCs will observe a significant decline in volumes – according to a market source. Brokerage houses have started raising warnings of negative impact on the oil marketing sector as furnace oil and RLNG margins are fixed as a percentage of oil prices – that have crashed.

Another reason why country might not be able to take full advantage of crashing oil prices is insufficient storage facilities. Many experts are reportedly suggesting stocking on strategic reserves for future needs as is planned by India, but so far decision makers back home have not even been able to build the storage facility to even avert a short term fuel crisis.