The impact of the virus outbreak is already being felt on oil markets as China, the world’s largest importer of oil, scrambles to curb the spread of the virus while trying to maintain business activities.
The country’s oil demand is already down amid efforts to contain the outbreak, including flight cancellations.
According to a comment from Wood Mackenzie, the near-term impact of the coronavirus outbreak on oil demand remains uncertain as much depends upon when and how China’s manufacturing industry restarts after the currently extended Lunar New Year public holiday.
Wood Mackenzie has lowered its oil demand forecast for Q1 2020 by nearly 900,000 barrels per day (b/d) to 98.8 million b/d.
“The Q1 2020 fall in Chinese demand – a 200,000 b/d drop to 13 million b/d – is the first year-on-year decline in the country’s demand since 2009,” Ann-Louise Hittle, Vice President, Macro Oils, said.
“OPEC is holding emergency talks to consider an additional 500,000 b/d cut, on top of its already agreed steep output quotas in a bid to balance the market and shore up crude prices.
“It’s a dilemma for the group because the duration of the hit to oil demand – particularly from China, the world’s largest oil importer – is not clear.
“Yet, without a further production cut, crude oil prices will remain under pressure and struggle to hold the mid-$50 per barrel price for Brent, let alone recover to above USD 60 per barrel before Q2 2020.”
Fitch Ratings believes that the coronavirus outbreak could curb oil demand growth if it continues to spread, leading to an extended production surplus as production grows in Brazil, Norway, and the US.
The surplus magnitude will depend on the duration of the outbreak and the ability of OPEC+ countries to adjust production levels, if required.
“We expect oil prices to remain highly volatile in 2020, with geopolitical tensions and economic sentiment being other key drivers,” the rating agency stressed.
Oil prices have been under pressure since the start of the coronavirus outbreak with Brent crude falling from just under USD70 a barrel in early January to about USD56/bbl in early February.
“In a scenario of materially lower oil prices than assumed in our price deck and weaker market sentiment it could become more challenging for the ‘B’-category oil and gas issuers to access capital markets, potentially resulting in a higher default rate in the sector. Ratings of Chinese national oil companies, namely CNPC/PetroChina, Sinopec, and CNOOC are linked to China’s sovereign rating and would therefore not be immediately affected, despite weakening credit metrics. Asian refiners could see further softening of refining margins due to lower demand and utilization rates,” Fitch said.
“The impact on Chinese domestic oil products consumption will depend on how quickly transportation and industrial activities will return to normal levels. Demand for imported oil could take even longer to recover, as refineries, which were facing a capacity surplus before the outbreak, will need to absorb excess inventories. The WHO’s declaration of a public health emergency of international concern could dampen China’s trade activities and further reduce domestic fuel consumption, with a more tangible impact on global oil supply-demand balance.”
China accounts for about 15% of global oil consumption and is the main driver of global demand growth. Its contribution to global consumption growth averaged 36% over the past five years and should have been close to 40% in 2020, according to the US Energy Information Administration (EIA). A further 30% of demand growth is driven by other Asian countries, including India.
Even without potential consequences from coronavirus, the oil market was expected to be well supplied in 2020. EIA expected supply to exceed demand by about 250,000 barrels a day due to growing production in the US, Brazil, Norway, and Guyana. The additional OPEC+ production cuts agreed for 1Q20 may not fully offset this.
As explained by Fitch, if the coronavirus outbreak deteriorates, the oversupply could become more significant, particularly in 1H20, potentially leading to more short-term pressure on oil prices.
“A drop in production in Libya following the military conflict in the country could mitigate oversupply, although it is not clear how long Libyan production will remain depressed. OPEC+ policies to manage production in line with demand and price sensitivity of US shale make a protracted dip of oil prices below USD50/bbl for Brent not very likely even in a stress-case scenario. However, OPEC+ may need to cut production further if the outbreak lasts for several months,” the rating agency concludes.
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