LONDON: Oil demand is shrivelling as the trade war between the United States and China trips up the global economy.
Estimates for March and April are pointing to year-on-year declines in regions that account for almost half of global oil demand, according to Morgan Stanley.
Indicators including the profit from making plastics have been sinking while refining margins in Europe recently hit multiyear lows.Even support from one of the tightest physical markets in years is starting to weaken – premiums refineries pay to procure immediate supplies are slumping.
That’s despite output being hit by a combination of Opec+ production cuts, US sanctions on major producers Iran and Venezuela, and an unprecedented halt to Russia’s giant Druzhba crude pipeline.
Analysts are now taking increasingly bearish views on consumption for this year.
“Demand expectations for 2019 have so far been unrealistic,” said Mark Maclean, managing director at Commodities Trading Corp in London, which advises on hedging strategies.
“China has slowed faster than people expected and the trade war is still having a significant impact, the EU will not be a pocket for demand growth this year and the United States is also problematic.
”Oil isn’t alone in showing weakness. While stocks have so far shown resilience in the face of the trade war, other parts of the global financial market betray investor fears. Government bonds have been on a tear, with the yield on 10-year US treasuries falling more than a percentage point since a November peak as traders seek out safer assets.
Other established havens have enjoyed similar demand, and gold touched the highest since April 2018 last week while the Japanese yen is near the strongest this year.
Concerns about oil demand are also filtering through to policy-makers in producing nations.
This week both Saudi Arabia and Russia addressed concerns that weaker consumption has the potential to send crude prices below US$40 a barrel if Opec and its allies don’t persevere with output cuts.
West Texas Intermediate traded at around US$52 yesterday, having slumped into a bear market last week.