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15/02/2020 | Analysis - Wuhan Coronavirus: The Bear Stalks Global Energy Markets?

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.


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. (Canadá)


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