Oil traders and analysts are scrambling to calculate the hit to demand from renewed coronavirus lockdowns in France and Germany, as fears over their impact drove oil prices to their worst week in six months.
For an industry still heavily scarred by the events of March and April, when prices went into freefall as widespread lockdowns cut global oil consumption by around a quarter, the second wave of coronavirus restrictions has left many shuddering. Brent crude, the international marker, fell 10 per cent this week to just above $37 a barrel.
The good news, traders say, is that the restrictions are not as unified — and generally less severe — than last time, making a direct replay of the events earlier this year less likely. In April, Brent prices fell below $20 a barrel as countries moved into full lockdowns in quick succession.
But Saad Rahim, chief economist at Trafigura — one of the world’s largest oil traders — said that the hit to consumption would still be substantial.
“The trajectory of restrictions is clear — it’s likely to get worse before it gets better,” Mr Rahim said.
Before the pandemic Europe’s oil demand, including Russia, was roughly 20m barrels a day, or a fifth of the global total. That fell to as low as 14m b/d in April before recovering to 18-19m b/d by October, according to Mr Rahim.
“For November, traders really need to start calculating that level will now fall back to 17-18m b/d,” Mr Rahim said.
Opec, the oil producer group, was already forecasting global oil demand would fall 10 per cent this year to average 90m b/d, but had predicted it would recover to almost 95m b/d over the northern hemisphere winter.
That view is now under threat, according to the latest forecasts. Rystad Energy estimates that France and Germany — which together consume about 4m b/d in normal times — could cut consumption by an additional 1.7m b/d next month.
“The market seems to have taken for granted that life during the third quarter was the new normal,” Rystad said. “The measures that we are seeing right now are a wake-up call.”
There are mitigating factors. Schools are broadly staying open, with the morning car run to drop off children likely to keep fuel demand ticking over. Heating oil and kerosene, often used in houses not connected to the gas grid, may get a boost from people working at home.
“Opec is likely praying for a cold northern hemisphere winter,” one oil trader said.
But the length of time restrictions are in place — and how far they spread — remains a big question mark.
Energy Aspects told clients this week that while they were trimming their European demand estimate by just 600,000 barrels a day in the fourth quarter, they were cutting their global demand estimate for the first quarter of next year by 1.7m b/d. That revision was based on the expectation that other countries in Europe and North America will eventually have to take similar measures.
“You will see parts of Europe and the US follow France and Germany with stricter measures, almost certainly,” said Amrita Sen at Energy Aspects. “And we expect that will last through at least until the spring.”
Rising Covid-19 cases in the US are also expected to have a knock-on effect on oil demand, even if many states do not yet face tighter restrictions.
“There’s pandemic fatigue, but people start to react again when people they know fall ill,” Mr Rahim said. “That road trip to see Mum and Dad gets cancelled. We’re not going back to March and April, but we may be going back to what we saw in May and June when people were still cautious.”