SUMMARY: The Wuhan coronavirus is shuttering factories and stymieing economic activity in Asia as millions of people stay home either by choice or government order. Clearly the shutdown is most pervasive in China’s Hubei province, where the outbreak originated, and where tens of millions of people will remain at home while many of their fellow citizens return to work on Monday.
Yet in
today’s highly interconnected economy, the fallout won’t restrict itself to
Hubei, or even China. This is particularly true of energy markets; China is, of
course, the largest energy consumer in the world in absolute terms, accounting
for some 54% of Asia’s consumption (seven times that of Japan in 2018).
Put
another way, when China coughs, global energy suppliers get sick – and early
indications suggest that this could be a nasty bug indeed.
IMPACT
There’s
wide agreement that the outlook for natural gas and oil is negative in the wake
of this ‘black swan’ event.
But the
burning question is: How bad?
One
estimate from Chinese energy executives interviewed by the Financial Times
predicted a 25% drop in oil demand over the month of February, or 3.2 million
barrels a day (bpd) compared to last year – the equivalent of 3% of global
consumption.
China is
the world’s top oil importer; in February 2019 it was consuming around 13
million bpd per month.
BP has
also sounded the alarm, warning that the coronavirus could shave up to 40% off
of demand growth over the course of the year. That would equate to some
300,000-500,000 bpd of lost consumption per day.
It’s
worth noting that the 2020 outlook for oil markets wasn’t overly positive even
before the Wuhan coronavirus emerged at the end of last year. Tepid demand
through 2019, trade disruptions, climate worries, oversupply due to the US shale
revolution, and divestment were all already pressuring global suppliers.
Brent
crude is currently hovering around a one-year low of $52, down from the $70
peak it reached on January 6 before the deluge of coronavirus-related news hit.
Two factors will write the story of where prices go from here: 1) how OPEC+
responds to the crisis; and 2) the extent to which the coronavirus continues to
spread worldwide.
OPEC’s
initial attempts at reversing price declines have floundered. During a
three-day emergency meeting last week, Russia rejected a Saudi proposal to cut
up to one million barrels a day in production to stabilize global prices,
citing the need to adopt a wait-and-see approach. The Saudi delegation
countered with a smaller, more short-term cut of 600,000 over the second
quarter, but this too was rejected by the Russians.
China is
also a major natural gas consumer; the country ranked 3rd in global consumption
in 2017, and it was the second-largest importer of liquefied natural gas last
year.
According
to the Financial Times, Chinese importers are seeking to cancel some 70% of
seaborne imports scheduled for February. Some buyers have declared force
majeure due to apparently legitimate quarantine-related shutdowns and staff
shortages at China’s ports. Others are likely seeking to break their contracts
to take advantage of a buyer’s market. Natural gas prices are bottoming out
amid the outbreak; LNG prices in Asia closed out last week at an average of $3
per million British thermal units according to S&P Platts – a record low.
In the US, prices dropped through the $2 per million BTUs last month due to a
mild winter and growing global supply. Similar to oil, natural gas markets were
already well-supplied heading into the year, which will make the downward price
pressure from the coronavirus even more pronounced. In fact, analysts at
S&P Platts have warned that it could be a matter of years before prices
recover from their present lows.