What does the coronavirus outbreak mean for the oil market?
Ever since the news of the coronavirus outbreak, it is no surprise that various markets have responded with alarm, and the oil market is no different. As a matter of fact, OPEC recently revised their prediction of global oil demand from 1.22 million to 0.99 million barrels per day (bpd), and this forecast will most likely be shared by both OPEC and allied non-OPEC producers in preparation for production cuts [3]. The International Energy Agency (IEA) also had similar forecasts, predicting a 435,000 bpd decrease in oil demand in the first quarter of 2020, an all-time low that has not been seen since 2011 [2].
Even the crude benchmark, a reference price for crude oil for buyers and sellers, dropped approximately 20% since reaching its peak in early January 2020 for both the U.S. West Texas Intermediate and the International benchmark Brent [3]. This drop was made worse due to concern of lowered oil demand in China. Specifically, OPEC predicted that Chinese oil demand would decrease to 0.2 million bpd in the first half of 2020.
Moreover, some petrochemical companies halted their operations due to the shutdown of the Chinese travel and business industry shortly after the country’s New Year celebration, resulting in a high hit on demand for fuels. Plenty of other industries suffered a blow due to the temporary shutdown as well. These include the mining, construction, and electronics industries. For instance, the shutdown of China’s key manufacturing regions detrimentally impacted copper prices due to a fall in demand, especially since demand for the metal makes up approximately 50% of consumption in key industries such as construction, auto, and durable goods [5]. Additionally, the halt in production and construction work in regions that make up 90% of China’s copper smelting, 60% of its steel manufacturing, and 40% of its coal output led to a drop in consumption and processing of commodities [1]. However, regardless of what industries were impacted, many required fuel as a means to operate or transport goods and materials. Thus, the oil industry suffered just as much.
Prior to the virus outbreak, the oil market was expected to improve in the second half of 2020 as a result of earlier oil production cuts from OPEC, stronger oil demands, and a gradual decrease in non-OPEC oil supply growth [2]. However, this is no longer the case due to the coronavirus, which stimulated additional cuts to oil production. OPEC even held an emergency meeting with non-OPEC partners earlier in February to cut oil production, and the committee suggested an 600,000 bpd reduction in oil production [3]. The coronavirus epidemic revealed how dangerously dependent OPEC was on Chinese growth, which made up three quarters of last year’s global gain. India was the only other country with similar magnitude of demand and expansion. Moreover, China is the second largest portion of market demand for oil, which is why its decrease in demand is extremely detrimental to the overall oil market.
Despite the beliefs of lowered oil demand from OPEC and IEA, there are still some who believe there is no need for panic, including U.S. Energy Secretary Dan Brouillette [4]. He believes that the market can quickly recover to its original state once a method to effectively contain the virus is found, which is far easier said than done. As of right now, the number of coronavirus cases is increasing, not only in size but also in the number of countries. How much longer will the oil market have to wait until improvements come to fruition? When China’s demand for oil is that crucial to the growth and success of the international oil industry, it might be more difficult for the oil market to successfully bounce back as anticipated, especially when market adjustments are made difficult due to the unpredictability of the coronavirus.
[1] Franklin, S. (2020, February 10). How will the coronavirus affect global construction commodities? Retrieved from https://archpaper.com/2020/02/how-will-the-coronavirus- affect-global-construction-commodities/
[2] Iea. (n.d.). Oil Market Report - February 2020 – Analysis. Retrieved from
https://www.iea.org/ reports/oil-market-report-february-2020
[3] Meredith, S. (2020, February 12). OPEC slashes oil demand outlook for 2020 as coronavirus
outbreak stifles China. Retrieved from https://www.cnbc.com/2020/02/12/opec-report- coronavirus-expected-to-weaken-oil-demand-growth-in-2020.html
[4] Meredith, S. (2020, February 14). No need to panic about coronavirus impact on oil markets,
US energy secretary says. Retrieved from https://www.cnbc.com/2020/02/14/ brouillette-no-need-to-panic-about-coronavirus-impact-on-oil-markets.html
[5] Weizent. (2020, February 4). Copper prices dive more than 12% this year, as China
manufacturers shut down over virus concerns. Retrieved from https://www.cnbc.com/
2020/02/04/coronavirus-chinas-manufacturing-city-shutdown-copper-prices-dive.html
[6] ZeroHedge. (2020, February 12). OPEC Slashes Oil Demand Forecast On Coronavirus
Crunch. Retrieved from https://oilprice.com/Energy/Crude-Oil/OPEC-Slashes-Oil-
Demand-Forecast-On-Coronavirus-Crunch.html
