A man wearing a protective facemask to help stop the spread of the deadly coronavirus which … [+]
The World Health Organization (WHO) is currently convening a special committee in Geneva, Switzerland where it will likely advise Director-General Dr. Tedros Ghebreyesus to declare a Public Health Emergency of International Concern (PHEIC) on the outbreak of the novel coronavirus (2019-nCoV).
This news will affect the outlook for the world economy, for commodities markets, and specifically for oil and gas.
The Year of the Rat begins with China’s worst public health crisis in decades. The highly contagious Coronavirus – originating in the central PRC city of Wuhan – has now infected 6,150 and killed 135 across 19 countries, according to John Hopkin’s University, and the numbers are rising exponentially.
The epidemic may prove a fatal blow to the precarious economies of China, the Far East, and beyond. There are few things that the Chinese leadership are more afraid of than global recession, as their legitimacy hinges on continued economic growth.
The outbreak comes amidst China’s 15 day lunar new year celebrations, often referred to as the largest annual migration of humans in the world. Beijing is taking extreme precautionary measures to contain the spread of the illness including quarantines and travel bans.
Global markets are not immune either, nor is the energy sector.
The S&P 500 ending Monday down 1.6% — its worst session since October. Morgan Stanley announced that the index could drop as much as 5% before the current downturn is over, citing an already overheated market. Many Asian stock markets were closed for the Lunar New Year but those that remained open, including Japan’s and South Korea’s, fell on news of the epidemic.
Safe-haven assets like gold and the US dollar saw heightened activity. Spot gold was up 0.4% at $1,5772.29 per ounce, and the greenback is now at a two-month high.
Oil markets are not faring much better.
Brent crude has hit a 3-month low in the wake of the coronavirus news, and has declined by roughly $7-per-barrel over the last week. It is currently trading around $58.75.
Edward Marshall, a commodities trader at Global Risk Management, told the Wall Street Journal “I think we’re close to peak hysteria, so yes the move is justified. We’re in full panic mode.” Compare that with Brent’s January high of $70 earlier this month following the assassination of Iranian military leader Qassem Suleimani. American West Texas Intermediate (WTI) futures are hovering at $53 per barrel, down $10 from January 06.
Brent crude prices are down more than $10 since the killing of Iranian military leader Qassem … [+]
China is the largest crude importer in the world and has seen its appetite for oil grow at around 5.5% annually, making it an important buyer in the global market. China’s travel restrictions alone at the height of the Lunar new year could drop domestic demand for jet-fuel around 300,000 barrels per day (bpd) in the first quarter of 2020. The impacts on automotive, rail, ferry, and other oil-based transpiration are still yet to be calculated. Combine this with fears of a slowing Chinese economy and a generally oversupplied market on the heels of record US oil production, and we have a recipe for consistently depressed oil prices.
The oil market impact is not lost on OPEC and its allies, who have already met to discuss deeper potential cuts to oil production should the outbreak continue to weigh down prices.
Prince Abdulaziz bin Salman, Saudi Arabia’s energy minister insists that there is “very little impact” on global oil demand, noting that there was also “extreme pessimism” during the severe acute respiratory syndrome (SARS) outbreak in the early 2000s, but that impact on oil consumption was not significant overall.
This is largely true.
While 2002-2003 SARS cost the global market upwards of $40 billion dollars, effects on oil markets were short lived. Oil prices did drop by as much as 20% and Chinese oil demand shrank by 2%, but this only lasted for about one quarter. Keep in mind this was the reaction to a much more deadly illness – the SARS mortality rate is above 10%, whereas Coronavirus is closer to 2%—3%. The Chinese government is also taking containment measures much more seriously this time around, which should significantly reduce the damage of the virus.
For now, oil markets remain weak. Macroeconomic headwinds – from high global inventories to slowing Chinese growth and strong shale production — will continue to weigh on crude prices. And until confidence is restored in the international community’s ability to address this public health crisis, we can expect oil to remain lower still. Stay tuned.
With Assistance from James Grant and David Pasmanik
