Middle East drastic measures to fight COVID-19 seen hurting oil products demand

Dubai — Middle East countries are racing to control the spread of COVID-19, from Saudi Arabia locking down an oil-producing region to several Gulf countries banning regional flights at the expense of their energy-based economies.

The measures coincide with crashing oil prices, which dropped on Monday by 31%, a one-day decline not seen since the 1991 Gulf war when the US sent troops to the Gulf to kick out Iraqi troops that had invaded neighboring Kuwait and burned its oil fields. Local oil products demand is likely to suffer, according to S&P Global Platts Analytics.

Saudi Arabia announced over the weekend it would lock down Qatif province, the location of major crude facilities belonging to Saudi Aramco, the world's biggest oil producing company that has a production capacity of 12 million b/d.

Aramco said on Monday operations continue as normal in the region, which is home to a large Shiite community who often visit holy sites in Iran, where coronavirus has spiraled.

Qatif includes facilities to produce, process and transport 500,000 b/d of blended Arabian Light oil from the Qatif field and 300,000 b/d of Arabian Medium crude from the offshore Abu Safah field, according to the Aramco website.

Analysts said the lockdown is unlikely to affect operations unless other areas in the oil producing eastern region are quarantined.

"Going forward the impact is very much dependent on the number of new cases and their location, i.e. still within Qatif or in another governorate," Tom Kenison, an upstream analyst with consultancy FGE, said. "This could widen the lockdown/quarantine zone in order to halt the spread of the virus."

Local demand

Regional demand for oil products is likely to take a hit from all the measures, according to the latest Platts Analytics estimates.

Total oil product demand in the Middle East will likely decline by 0.6% year-on-year to average 9.7 million b/d in the first half of this year, it said. The drop compares with a 1.1% year-on-year growth in the first half of 2019. On an annual basis, total oil product demand will likely drop by 0.2% year-on-year to 9.8 million b/d compared with 0.9% year-on-year growth last year.

Saudi Arabia's drastic measures in Qatif add to the oil market turmoil sparked by the OPEC kingpin's slashing of its April oil prices as it plans to turn the taps on following its failure to convince Russia, its main ally in the 23-member OPEC+ coalition, to strike a deal to extend and deepen output cuts beyond March.

Middle East countries have reduced global and regional flights to and from countries where coronavirus infections have soared and suspended classes in schools and universities. Others have closed borders to some neighboring countries, such as Iraq, which closed all nine border posts with Iran to contain the spread of the coronavirus from one of its main trading partners.

Saudi Arabia has also for the first time in centuries closed the holy city of Mecca, the birthplace of Islam, to religious visitors from outside the kingdom, a move that will limit mini-pilgrimages or Umrah that attracted some 7.5 million visitors last year.