Coronavirus: To What Extent Could It Impact Oil Markets?

Published February 5th, 2020 - 07:48 GMT
Coronavirus: To What Extent Could It Impact Oil Markets?
Given that it is a high-risk scenario, businesses are discontinuing operations and money is being diverted towards safe assets like gold – all this chaos has even pushed up the value of the US dollar. (Shutterstock)
Highlights
At that time, oil markets had not recovered from the after-effects for nearly a year but the market impact was moderate and the GDP growth level for China fell just one percent in 2003.

The coronavirus factor has become a major risk for energy markets which were already quite erratic.

China is at the epicentre of what may soon become a pandemic. Since more than a week, the country has been at a standstill due to a rapidly spreading coronavirus that has made routine life impossible. 

As the deadly disease spread further to 18 more countries and infected nearly 8,000 people with a three percent fatality rate, the World Health Organization (WHO) has now declared it a global health emergency.

Trying to contain the epidemic, Beijing has declared a quarantine in the city of Wuhan in Hubei province, where it initially started. But soon the entire province had to be locked down and people are now virtually grounded with only food and medical supplies reaching them.

Due to reduced economic activity and restrictions on transportation, trains and buses hardly have passengers nowadays while flights are slashed as most countries have halted air traffic from China.

In 2003, China went through a similar crisis with the outbreak of the SARS epidemic which infected 8,096 people across 29 countries with 774 fatalities.

At that time, oil markets had not recovered from the after-effects for nearly a year but the market impact was moderate and the GDP growth level for China fell just one percent in 2003.

But for several reasons, it can be expected that the Wuhan virus will do more damage than the outbreak of SARS. Firstly, the coronavirus factor has become a major risk for energy markets which were already quite erratic.

Based on SARS projections carried forward to 2020, Goldman Sachs has forecast a daily reduction of 260,000 barrels, including the loss of jet-fuel, but with more affluence Chinese travel even more frequently now and the figures can be much higher.

As the second-largest oil-consuming country, Beijing's requirement for oil boosts global sales. Nowadays, it's thirst for oil was increasing at 5.5 percent every year and the current crisis should affect fuel markets by at least 10 percent.

  The question isn't whether coronavirus will depress global oil demand, rather, the question is by how much

As its air travel becomes negligible, China's demand for crude and its by-products like jet fuel will also be much less.

Rattled already, oil markets prices briefly fell to their lowest level since October last year. Describing the odds, Ryan Sweet from Moody's Analytics has said that, "The question isn't whether coronavirus will depress global oil demand, rather, the question is by how much."

Meanwhile, dreading an upset in the oil markets, the Middle Eastern energy industry is trying to tide through the crisis. Trying to calm investors, Saudi Arabia's energy minister, Prince Abdulaziz bin Salman dismissed dismal assessments, saying that the Wuhan crisis would have a "very limited impact on global demand".

As the biggest oil producer, Riyadh would like OPEC to ensure market stability and prop up prices with deeper production cuts. In support, the UAE Minister of Energy Suhail Al-Mazroui said that, "It is important that we do not exaggerate projections related to future decreases in oil demand due to events in China."

Secondly, the emergency will be a major disruption for world markets globally as China is the world's second largest economy now.

Beijing's economic clout has increased a lot since 2003. Back in 2003 it generated just four percent of the global GDP, in 2019 it was 16 percent. Having a much larger middle class now, any pause in economic activity creates a bigger vacuum for the Chinese economy.

Cutting down on transport and entertainment by even 10 percent could make Beijing's economy shrink further by 1.2 percent this year, according to S&P Global. Any changes in demand and supply from China can generate losses for most economic sectors globally.

Even China's share of global exports has only increased in the previous year, despite an ongoing trade war with the US. In panic mode, international investors have already started abandoning stocks in Asia so a regional impact has already been felt. Given that it is a high-risk scenario, businesses are discontinuing operations and money is being diverted towards safe assets like gold – all this chaos has even pushed up the value of the US dollar.

According to Nigel Green from the deVere Group, "The coronavirus is the number one threat to financial markets currently as global investors are becoming jittery on the uncertainty."

As the coronavirus continues to spread further, global stock markets have felt the aftershocks and Hong Kong stocks have dipped by more than five percent.

Thirdly, one more setback is unpredictability as the ultimate extent of damage, its duration and even its reach cannot be calculated right now. In just a week, the crisis has ruined tourism businesses, brought down consumer spending drastically at the time of the Chinese New Year and made several multinationals cease operations.

Even though it is not as deadly as SARS, which showed a mortality rate of 10 percent, this virus has rapidly created a major scare in markets. Feared by various experts to have the potential of turning into a 'black swan event' that could rock the world, the virus outbreak can be very lethal if it turns into a pandemic.

  A Saudi businessman, Mohamed Fadl Al-Rahman expressed fears that as the infection spreads, trade exchanges between Riyadh and Beijing would get affected and the movement and supply of goods would stop as many employees in Chinese cities were grounded  

Even traders in the Middle East are worried about the consequences if the situation gets prolonged. A Saudi businessman, Mohamed Fadl Al-Rahman expressed fears that as the infection spreads, trade exchanges between Riyadh and Beijing would get affected and the movement and supply of goods would stop as many employees in Chinese cities were grounded.
Notably, Saudi-China trade is worth more than $65 billion.

Fourthly, such a large-scale isolation and quarantine has never been implemented in human history. However, Beijing's handling of this crisis has been much better than at the time of SARS with better precautionary measures and health care so the resumption of normal economic activity all depends on how soon it can be contained.
The concern for economic observers will be the potential duration of China's efforts to bring the outbreak under control.

But the silver lining is that the extent of economic spillover is still nominal and has only impacted a few sectors, plus the fallout is still concentrated within China mostly. If things go back to normal in a few weeks, damage can still be contained without major impact and economic activity will revive with new energy.

Meanwhile, China is doing its best to minimise the economic backlash, as calling on investors to "rationally and objectively analyse the impact of the epidemic," China's securities regulator requested them to "adhere to the concept of long-term investment."

Just weeks ago at the World Economic Forum at Davos, the International Monetary Fund had also downgraded its growth forecast for China in 2020 to just 3.3 percent.


Copyright @ 2020 The New Arab.

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