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Restarting the engine: Asia, oil and coronavirus

Asia, which has driven global oil demand growth, has shown resilience during the pandemic, but path to recovery may not be smooth.

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China's economy has clearly been on a V-shaped recovery path so far, but faces headwinds to further growth for the rest of the year.

THE novel coronavirus pandemic triggered a collapse in passenger transportation-related oil demand due to the enforcement of lockdowns, starting with China in late January and February and extending to the rest of the world in March and April, as countries around the world tried to mitigate the virus spread.

A catastrophic economic deterioration ensued almost immediately after the lockdowns. Many activities were curbed - not just in the tertiary sectors but also in manufacturing, affecting freight-related and industrial and feedstock-related oil demand. S&P Global Platts expects Asian demand to drop by an unprecedented 1.7 million barrels per day (bpd) in 2020, down from growth of 680,000 bpd in 2019 and posting the first decline since the 2008 global financial crisis. But in 2021, led by demand recovery in China and India, Asia is expected to return to growth of 1.6 million bpd.

Globally, oil demand is expected to contract in 2020 with the more severe demand destruction having already happened in the second quarter. A rebound is then expected in 2021, but this will not wholly compensate for the decline this year: oil demand in 2021 will still be at least 1.8 million bpd lower than the 2019 level.

The Asia-Pacific region - fuelled by growing population, urbanisation and rising disposable income - has seen its oil demand expand rapidly in recent years. The region accounted on average for about two-thirds of global oil product demand growth between 2011 and 2019.

The growth was unsurprisingly concentrated in the region's most populous nations, China and India, which together accounted for more than half of global growth over the same period. As a result, the Asian share of global oil demand rose from 31 per cent in 2010 to 36 per cent in 2019. Nevertheless, 2020 will mark an interruption of the recent sustained rise in oil demand, as the coronavirus crisis leaves virtually no territory unscathed.

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To paraphrase a popular saying, when China sneezes, the world (Asia) catches a cold. This is certainly the case for oil demand as China now accounts for close to 40 per cent of regional consumption, and contributed to nearly 60 per cent of growth in the region over 2011 to 2019.

China was the first country to be hit by Covid-19, with its oil product demand plunging year-on-year by 1.2 million bpd in Q1 2020. But it recovered quickly with the lifting of lockdowns, and demand rose again by 670,000 bpd year-on-year in Q2. China avoided a recession after its economy grew 3.2 per cent in Q2 2020, following a 6.8 per cent contraction in the first quarter. The country's oil demand is projected to go down for the whole year by some 95,000 bpd or 0.6 per cent - the smallest decline percentage-wise among all major countries around the world.

The situation is not helped by falling demand in India, the other main centre of growth in the region, amid a nationwide lockdown. Demand recovered strongly in May and June, but still dropped by a massive 1.1 million bpd on average in Q2. July oil demand was lower month-on-month with consumption hit by localised lockdowns, coupled with the monsoon season and higher fuel prices.

Platts Analytics expects India's oil demand recovery to slow in H2 due to localised lockdowns following an uptick in coronavirus cases, with the demand for the whole year to contract by 505,000 bpd versus 2019.

India is now the second worst-hit nation in the world, behind only the United States, and the worst in Asia, with over four million confirmed Covid-19 cases, the number of new daily cases surging after the lifting of nationwide lockdown in late May.

The rest of Asia is expected to register a decline in oil demand of 1.1 million bpd in 2020, with falls in both developed and emerging economies. Japan's oil demand is expected to drop by 330,000 bpd this year, after the nation imposed a state of emergency that lasted until late May. South Korea will not be spared either, despite its effective containment of the outbreak, with a drop of 55,000 bpd.

South-east Asian oil demand is expected to drop by 520,000 bpd. The Philippines is now the epicentre of the pandemic in South-east Asia, having overtaken Indonesia in the total number of Covid-19 cases. The Philippines' economy contracted by 16.5 per cent year-on-year during the second quarter, marking its deepest fall on record, while Indonesia reported its first economic contraction in more than two decades after Q2 gross domestic product (GDP) shrank by 5.3 per cent from a year earlier.

Singapore's oil demand is expected to drop by 145,000 bpd this year due to Covid-19. International flights came close to a halt with border closures and restrictions. Road traffic was also affected by circuit-breaker measures in April and May to contain the outbreak. Most workplaces were closed, except for those providing essential services, and schools moved to full home-based learning. The city-state started to reopen economic activities in June, allowing the gradual resumption of more economic activity with safe management measures in place. The second quarter GDP marked Singapore's worst-ever quarterly performance, with a drop of 13.2 per cent year-on-year. However, it is not all doom and gloom as Singapore's bunker sales, boosted by low outright prices, remained robust and were up by 4 per cent on-year for the first seven months of 2020.

In terms of demand for key products, only liquefied petroleum gas (LPG) is expected to grow this year. This growth will be driven by feedstock demand from propane dehydrogenation plants in China and ethylene plants in Asia as it becomes cost-effective from time to time, coupled with residential consumption in India as the government gives out free LPG cylinder refills to low-income households.

The pandemic has weighed heavily on demand for petrol and jet fuel. Both products are related to discretionary travel, which is severely curtailed by government measures such as quarantines, lockdowns, border closures, school and office closures and limited social gatherings, among others, as well as people changing their behaviour due to fears of contracting the disease.

By mid-August, congestion in Wuhan - the epicentre of China's Covid-19 outbreak - was back to normal levels seen over the last four years, says Amap. Except for Beijing, where road traffic has still not recovered following a re-emergence of Covid-19 cases in mid-June, major cities including Shanghai, Guangzhou, and Shenzhen were all close to normal levels at the time of writing.

Data from Apple's Mobility Index points to further improvement in driving activity among Asian countries outside China. Weighted against the baseline of Jan 13, 2020, the index indicates regional driving activity was back to 100 per cent of that level as of mid-August. Activity in most countries has been on an upward trend since the April lows.

These mobility index trends are highly consistent with the latest developments in coronavirus lockdown measures. Almost all economies in the region either ended or severely relaxed restrictions by the end of May. June saw the index rise by 23 per cent from the May average, with the pace of improvement slowing to 13 per cent in July. The mobility index has lagged in countries that have been less effective in dealing with the pandemic, such as India and the Philippines.

Gasoil/diesel is the more resilient of the main refined products because it is used in many different sectors, including energy-intensive industrial and manufacturing, in addition to transportation. In times of crisis, governments will do whatever it takes to keep economic activity going, such as the introduction of various stimulus packages, which will help to support gasoil/diesel demand.

China's economy has clearly been on a V-shaped recovery path so far as headline macroeconomic numbers continued to come in strong and above expectations in recent months, as reflected by leading indicators such as the manufacturing Purchasing Managers' Index. But most other Asian countries are still in the recovery stage, and even China is facing headwinds to further growth for the rest of the year due to the weakened global economy, the continuous impairment of international travels and China's own stimulus programmes possibly running out of steam.

BUSINESS NOT AS USUAL

While Asia's oil demand is expected to grow by 1.6 million bpd in 2021 as economic activity continues to resume, it will not be a return to business as usual for some sectors, particularly aviation. For 2021, Platts Analytics still sees Asian kerosene/jet fuel demand lower than that of 2019 whereas petrol and gasoil/diesel demand is likely to surpass 2019 levels. Taking all products together, Asia's oil demand in 2021 will still be lower compared to the level in 2019.

However, the recovery is not guaranteed. With Covid-19 cases continuing to increase globally as well as in Asia, and the resumption of international travel proceeds slowly, the prospects for 2021 demand recovery still face some headwinds and uncertainties. The end of the summer driving season and falling temperatures will not only mark the start of the lower demand season, but also the onset of the northern hemisphere's winter will make it increasingly challenging to keep social distance for human activities in order to limit the spread of coronavirus. The extent to which another serious wave of the Covid-19 pandemic can be avoided this winter remains unclear, even as the world looks ahead to a more lasting improvement in 2021.

  • The writers are from S&P Global Platts Analytics. 
    The 36th Asia Pacific Petroleum Conference (APPEC 2020) is taking place virtually from Sept 14-16

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