Corona virus saps China energy and beyond

• Published date: 01 March 2020
• Date: 01 March 2020
• DOI: http://doi.org/10.1111/oet.12761

FOCUS

Corona virus saps China energy and beyond

The full impact of the COVID-19 corona virus on world

oil and gas markets is only slowly becoming clear. Ini-

tially, the impact was very much focused on China, but

since mid-February it has spread to at least 40 countries

around the world, while the rate of new cases in China

appears to have slowed in the wake of tight quarantines

covering millions, especially around the original epicen-

ter of Wuhan.

The 26th February was the first day there were more

reported cases outside China than inside. By then, the

virus had killed over 2500 people globally and infected

more than 80 000,

1

with major outbreaks in Italy, Iran,

and South Korea, as well as China, resulting in the exten-

sion of quarantines to cities and towns in these and other

areas. The World Health Organization declared an inter-

national emergency on 30 January, but (as of 28 February)

had not yet classified it as a global pandemic, despite

widespread calls to do so.

The quarantining means economic activity grinding

to a halt in some areas, which has an immediate knock-

on effect on the wider global economy in today's inter-

connected world (eg, a shortage of Apple phones, which

are manufactured in China, is anticipated). Hubei Prov-

ince alone, where the disease epicenter of Wuhan is

located, accounts for over 4% of China's GDP and remains

in lockdown, with other restrictions in place across the

country, although some of these were being relaxed by

the end of February. The impact is being felt in the con-

sumer sector as well, with retail activity well down, while

reduced travel is also having an impact on the wider

global economy, especially East Asia. These economic

effects are, in turn, effecting oil and gas demand (as well

as the wider energy industry in China), which has caused

oil prices to slide, despite moves by OPEC to offset the

demand falls with deeper cuts to supply.

2

Brent crude prices have moved into contango (where

forward prices are higher than current levels) as prompt

demand weakens in response to refinery run cuts, and

analysts around the world are slashing demand forecasts

for 2020—the latest at end-month suggest there may even

be a slight fall in demand this year. Product prices, which

are the first to feel the impact of lower demand, have in

many cases fallen further than crude, narrowing crack

spreads and refining margins, especially in Asia, and

leading refiners to cut runs. Liquefied natural gas (LNG)

prices too, already at record lows, are coming under fur-

ther downward pressure.

Looking at crude in more detail, April Brent crude

began the year at over $68/bbl (see Figure 1) and fell

steadily to just above $53/bbl on 10 February. It then

recovered for a few days as new infection figures from

China began to decline and expanded OPEC-plus action

appeared on the cards, reaching a peak on 20 February of

almost $60/bbl. Since then, it has fallen sharply again

(alongside stock markets) as the implications of the inter-

national spread of the virus are priced in. There remains

huge uncertainty over the extent of infections, likely

quarantines and the knock-on impact on demand, with

the Americas less affected so far compared to parts of

Europe and Asia.

“There are so many huge unknowns about this out-

break. For example, we don't know just how infectious

people are before they show symptoms. That makes it

impossible to predict what is going to happen,”said Pro-

fessor Mark Woolhouse, Professor of Infectious Disease

Epidemiology of Edinburgh University, in The Guardian

on 16 February.

1|GROWING IMPACT ON

DEMAND

The extent of the impact on demand has been rising

steadily. In early February, reports suggested a fall in

Chinese demand of 20% in January, equating to 2 to

3 mn bpd or 2% to 3% of global demand. That is expected

to be higher still in February. Lower Chinese refinery

throughput will result in a slowing of crude oil imports

in April and May—February and March deliveries are

already on route, which means a likely significant

unplanned build in regional crude stocks (see below).

On 12 February, in its monthly report, OPEC cut its

forecast for global oil demand growth this year by a mod-

est 230 000 bpd, based on weaker coronavirus-related

demand in China (only); estimating 2020 oil demand

growth at 990 000 bpd. But by the end of February, this

was clearly looking overly optimistic. Other sources mid-

month were adjusting 2020 growth forecasts based only

on the impact in China by up to 500 000 bpd, leaving

only modest growth overall for the year.

Oil and Energy Trends. 2020;45:3–9. wileyonlinelibrary.com/journal/oet © 2020 John Wiley & Sons Ltd 3

DOI: 10.1111/oet.12761