The coronavirus outbreak in China has made headlines for a month, hitting oil prices and sending OPEC into a frenzy to find a way to stop or at least slow down the decline, while smaller US producers struggle with the outstanding payments of debt amid depressed prices.
And it could get worse.
Earlier this week, optimism returned to stock markets and oil prices rose briefly when suggestions began to emerge that the virus could have peaked. And then China changed its methodology of counting the new cases, which meant that the number soared considerably, which slowed the oil price rebound. Stocks may have continued to rise, but oil has remained stubbornly low.
China is the world’s second largest oil consumer after the United States. It is also the world’s largest importer of oil, representing a little more than 20 percent of all world oil exports. It is not surprising that oil prices react to all the news coming out of China.
The immediate effect of the coronavirus outbreak on oil prices is easy to see. Quarantines have very limited trips, reducing fuel demand. State refineries have reduced their processing rates by one tenth this month and will cut further in March, according to OilX. The combined cut for PetroChina, Sinopec and CNOOC for February was around 940,000 bpd, according to a Reuters report. Private refineries cut even more, as OilX calculates the cut by 25 percent.
However, in a somewhat surprising turn of events, earlier today Bloomberg reported that independent refineries have gone shopping, taking advantage of low prices.
Now, based on all that, one could argue that the negative effect of the epidemic on oil demand will be temporary and at the moment when the outbreak begins to disappear along with the panic it caused, the demand for oil products will begin to to get better. However, the outbreak could damage the Chinese economy enough to lead to a longer period of moderate demand and oil prices, respectively. Related: Trump metal wants more than gold
China’s economy could slow down at a 5 percent growth rate this year due to the coronavirus, Gaurav Sharma of Forbes wrote this week. That would be 1 percentage point lower than what the International Monetary Fund predicted for the Chinese economy last month. The GDP growth of 5 percent would still exceed the world economy, which the IMF sees growing 3.3 percent this year, but would be lower than what oil exporters expected. In such a large economy, each percentage point up or down makes a difference in prices.
In fact, China’s economy has become so essential to the global economy, it is what investors must observe to obtain investment information. That and oil prices, said Ivan Martchev of MarketWatch in a recent story. In it, he pointed out that the slowdown of the Chinese economy would have global repercussions and would particularly affect energy reserves.
“If the price of crude oil does what it did in 2015, which culminated in the January 2016 minimum of $ 26 per barrel, there is a substantial disadvantage for both the actions of integrated energy companies and those of oil services more leveraged, “Martchev wrote, noting that most energy stocks are already underperforming due to lower investor confidence and persistent price-derived challenges and the momentum of an energy transition to less polluting sources .
However, not everyone is so worried. The legend of hedge funds Ray Dalio, for example, said that while the short-term effects of the coronavirus outbreak would be substantial, they could be exaggerated.
“I think the most likely result is that this virus will be a larger version of the SARS that will have a significant temporary effect but will not have a great long-term influence, so downward movements in the market price are probably being exaggerated. , Dalio said in a LinkedIn post.
It is clear that oil prices will remain moderate until the worst of the outbreak has passed. The interesting question, then, is how much bullish potential oil it will have when this happens. Unfortunately, with a clear and current global supply overload, this may be limited, and it can be negative if the Libya oil port blockade ends soon. However, if the current course continues, and if Chinese demand recovers fast enough, there will be good news for oil exporters.
By Irina Slav for Oilichelin
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