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3/10/2020 12:00:00 AM

After months of worries about crude oil supply being thwarted by geopolitics, the industry narrative has flipped, with the novel coronavirus outbreak in China sparking fears about demand. In reaction, oil prices spiralled as low as $53 per barrel of Brent crude, down from a 2020 high of $68 per barrel.

“The market response to the health crisis in China is highly reactionary in nature, given that it is not yet clear how deadly the disease will be and what the long-term impacts on the Chinese economy and commodities could be,” says John Bambridge, features and analysis editor at GlobalData.

At the epicentre of the outbreak is Wuhan, a transportation hub home to 11 million people in central China. As of writing, more than 100,000 people have been diagnosed with the coronavirus, and at least 4,000 are dead because of the illness, with the overwhelming majority in China. The existence of the coronavirus was first noticed by a Chinese doctor in late December 2019, and various reports have estimated that it will take a minimum of one year to develop a vaccine.

“The outbreak of the coronavirus in the Chinese city of Wuhan brought back memories of the SARS outbreak in China in 2003,” says Ole Hansen, head of commodity strategy at Saxo Bank. “Before being contained, it had killed hundreds and hit the Asian economies hard as business and consumer demand plummeted.” China has radically changed since the SARS outbreak, more than doubling its oil consumption—it has a much wider impact on the market now than it did in the early 2000s. The International Energy Agency (IEA) estimates that China was responsible for more than three-quarters of the growth in global oil demand in 2019.

“The timing could not have been any worse with the [coronavirus] outbreak occurring days before the beginning of the Chinese New Year, when hundreds of millions of workers travel home to visit their families. With several cities in lockdown and many events cancelled, the Chinese economy is likely to take an economic hit during the first quarter,” Hansen adds.

Chinese authorities have completely shut Wuhan off from the rest of the world, stopping planes and trains traveling outside of the city, and halting public transportation inside the city. At least 12 other cities in the Hubei Province have restricted travel—considering just Wuhan and two nearby cities, Huanggang and Ezhou, more than 19 million people have essentially been grounded in place. As the coronavirus spreads, more travel restrictions are being enacted in affected countries.

“When cities are placed under quarantine, and public transit is shut down, by definition that reduces economic activity and has a negative impact on energy demand, oil included,” John Freeman, a Raymond James analyst, says in a note to clients. “Once there is evidence that the outbreak is contained and thus economic disruption subsiding, sentiment on oil should improve, bringing prices back up.” But since it was declared a health emergency on 30 January, the coronavirus has spread to at least 35 other countries.

Chinese tourists are responsible for $277 billion worth of spending per year, according to the UN World Tourism Organisation, and with millions facing restricted travel during a major holiday, when fuel sales typically jolt, that means far fewer active trains, planes, buses, cars, and other vehicles—and far less fuel needed to power these vehicles. With many factories shut down and idle, it also means less energy needed to power industries. In any other country, this might not create a huge dent in oil demand. But China has a massive appetite for oil, and anything that happens in China has global repercussions.

China became the world’s largest oil importer in 2016, surpassing the US. In 2019, it imported a record breaking 506 million tonnes of crude oil, according to the General Administration of Customs. The increase is mainly due to growing demand from new plants which have, over time, added 900,000 barrels per day (bpd) of oil processing capacity.

Last year, it halved shipments from the US due to the trade war between the two nations, with no December imports recorded. However, as part of the phase one deal to end the dispute between the two countries, China pledged to buy a minimum of $52.4 billion worth of US energy products in the next two years. Research from Refinitiv showed that China continued to purchase a limited amount of Iranian oil after the US applied sanctions against Iran. In 2019, it imported approximately 14.77 million tonnes, half of the amount it imported in 2018.

Source: Oil&Gas