Energy

Some Oil Market Details Regarding The Coronavirus


It’s said the quote “the devil is in the details” was originally “God is in the details,” but in terms of the coronavirus (CV), the details could definitely be the oil market’s devil. Many have noted that the SARS virus was a blip on the global oil market, affecting oil demand and prices only briefly and minimally and the coronavirus is much less deadly. The estimated $40 billion loss of global economic activity from SARS is all but invisible when examining the global economy (see figure), and was trivial compared to the 2008 financial crisis. 

Even zooming in on China specifically (second figure), annual GDP shows no significant impact from the SARS crisis. (The very smooth shape of the curve probably reflects the tendency of reported GDP growth to track official goals very closely.) More instructive is the third figure, showing oil demand growth in China and “Other Asia” by quarters, and in the second quarter of 2003 demand is down sharply in both regions before rebounding. Similarly, a year from now, the impact of CV on the global economy should appear fleeting. But the near-term impact could be more significant, especially when considering more specific effects such as on product differentials.

Without a doubt, the effects of CV will be different from that of SARS for a number of reasons, especially the fact that, while it appears much less deadly than SARS, it also appears to spread much more easily. And the public reaction might be considered an irrational level of panic (especially given that the flu is much more dangerous yet has minimal effect on people’s behavior or psyches), but it is clearly very real, as air travel to China has plummeted, an effect that could spread to other parts of the world. Which is not to diminish the effect on energy demand from less coffee roasting as Starbucks closes its Chinese stores.

The impact becomes more disconcerting when the varied impact on economic sectors is examined. For example, manufacturing will suffer much less than tourism and air travel will be hurt much more than road travel. Indeed, the next figure shows U.S. jet fuel demand and the impact of both the September 11th attacks and the SARS virus are visible, although the former is much more significant.

Prices show the effect much more clearly. The next figure shows the differential between the price of a barrel of WTI and prices for jet fuel, motor gasoline, and middle distillate (heating oil in this case, but diesel fuel effectively). Gasoline prices remained robust, but jet fuel and even middle distillate margins were depressed after early March 2003, the date of the declaration of an emergency by WHO.

Obviously, there are numerous factors affecting product prices, but if global jet fuel demand drops by 10% or about 1 mb/d for even two weeks, inventories would increase by about 15 million barrels. Given a back-of-the-envelope guesstimate of 200 million barrels global inventories, that represents a big enough increase to affect prices, including for middle distillate which is an (admittedly imperfect) substitute for jet fuel.

This means that refineries with lots of hydroprocessing, which maximizes diesel production, will suffer losses compared to those with cracking units that maximize gasoline. The latter tend to predominate in the U.S., the former in Europe and Asia. Product yields also differ by crude, so that Nigerian crudes will be hurt more than U.S. light tight oil. (Talk to Anas Alhajji about #crudequalitymatters.)

It is still early days in the CV emergency, and the oil price drop appears overdone, but there is a lot more going on than just the aggregate supply/demand balance tells us. Let’s only hope the devil in the details is a minor demon.



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