Thursdays have become synonymous with the virus-induced collapse of the US labour market and yesterday was no different. Another grim weekly jobless report revealed that a further 2.4 million Americans sought unemployment benefits last week. This takes the total since mid-March to nearly 40 million, or over a fifth of the US labour force. Elsewhere, a preliminary business survey showed the downturn in eurozone private-sector activity eased this month as coronavirus restrictions were gradually lifted. That said, the bloc’s economy was still contracting at an unprecedented rate. Simply put, the global economy is still taking a beating from the COVID-19 outbreak.
Yet for all this gloom, shares on Wall Street were unperturbed. Markets seem to have developed an immunity to weak economic updates. Instead, their focus is solely on central banks’ blockbuster stimulus efforts. Nevertheless, leading US stock indices still ended the day lower as another headwind reared its ugly head, namely an uptick in US-China tensions. Investors are once again having to contend with an intensifying war of words between the US and China. Yesterday, Beijing threatened to hit back against America if it imposed sanctions over the coronavirus pandemic. Overnight, the US President took aim at the Chinese, this time for their plans to gain more control over Hong Kong through new legislation.
Trump’s China bashing is popular with the US electorate and will likely to continue in the run-up to November presidential elections. As much as this may help his re-election ambitions, it could potentially torpedo the “Phase One” trade deal signed by both sides earlier this year. Suffice to say, this would throw another spanner in the works for the global economy at the worst possible time.
A one-sided affair
Money is rushing back into oil on the back of improving supply-demand fundamentals. Prices have rallied as market players responded positively to OPEC-led cuts and accelerating US shale production shut-ins. Optimism is also building on the demand front as countries lift containment measures. China’s oil demand is all but back to levels last seen before the coronavirus outbreak and there are signs of recovering demand elsewhere. US gasoline consumption is more than 30% above last month’s trough. All the while, Indian diesel sales jumped 75% in the first half of May from April levels.
We are in the midst of a turning point for oil demand. Yet the trajectory remains uncertain. The extent of the recovery is unknown. What is clear is that the oil demand outlook is closely tied to the fortunes, or in this instance the misfortunes of the global economy. A recession is a certainty this year with the only question around severity. Just this week, a flurry of downbeat forecasts played to the market’s worst fears. Leading the doom-mongering was the chief economist of the IMF who pared back expectations for a recovery next year. This was followed by a survey from the World Economic Forum showing that a majority of investors are bracing for a prolonged global slowdown. Meanwhile, adding to the unease were comments from the Congressional Budget Office that the US economy won’t reclaim all of its lost ground until after 2021. These solemn economic predictions represent a significant obstacle to oil demand growth.
Alongside a protracted economic recession, there are other downside risks for oil demand growth prospects. Top of the list is the risk of a second or even third wave of coronavirus infections. Several small outbreaks have been reported in countries that have emerged from lockdown. What is more, there is the additional threat of the virus changing. A new cluster of cases in China showed the virus could be mutating. Needless to say, this will undermine efforts to eradicate the virus. Also acting as a potential brake on oil demand is the danger of a fresh US-China trade dispute. Tensions have resurfaced after Washington intensified its criticism of Beijing for its handling of the COVID-19 pandemic. And then there is threat of structural changing to people’s behaviours. Travel habits have been forcibly transformed in recent weeks and risk permanently denting demand for certain transportation fuels.
All in all, the oil demand outlook is clouded by uncertainty. This will put more onus on the world’s major demand centres to emulate the swift recovery in Chinese consumption. An obvious candidate is India which along with China is the leading protagonist in the growth market for energy. However, a return to normal for India’s economy and therefore oil consumption is not on the cards in the near-term. The country is facing its steepest recession on record following a two-month nationwide lockdown. India’s GDP is forecasts to shrink by an annualised 45% in the current quarter. And while fuel demand has picked up this month, it is still running at about 40% below last year’s level.
In short, a “V-shaped” recovery for global oil demand is wishful thinking. The coronavirus has nullified a decade of global oil demand growth and the recovery will be slow going forward. Any rebalancing in the coming months will therefore come primarily from the supply side, assuming OPEC+ stays true to its oil-cutting ways.