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Julianne Geiger

Julianne Geiger

Julianne Geiger is a veteran editor, writer and researcher for Oilprice.com, and a member of the Creative Professionals Networking Group.

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Coronavirus Panic Is Causing A Worst-Case Scenario For Oil

As the World Health Organization on Friday upgraded its global risk assessment for the coronavirus to “very high”, anxious oil markets are wondering when might be a good time to panic about the oil demand and its effect on inventories, investment dollars, and ultimately, oil prices.

Now could be as good of a time as any.

Where We Stand

So far, the coronavirus has infected more than 80,000 people worldwide, claiming nearly 3,000 lives. It has spread to 49 different countries in just a few short weeks, and continues to disrupt airline travel on a massive scale. In California, one possible case of community transmission reared its head—bringing awareness of what the virus can do to a whole new level.

And make no mistake, there is more pain coming.  

Already, COVID-19 is disrupting manufacturing and industrial output, specifically in China, and the FDA said this week that the world is experiencing its first drug shortage from these coronavirus-induced manufacturing disruptions.

China’s massive oil refiners have felt the pain too, scaling back their petroleum products output, resulting in a big gaping hole in the demand side of the now precarious supply and demand equation for crude oil. Some suggest that China’s fuel demand now has a 4-million-barrel-per-day hole, and China’s imports of crude oil is expected to have dropped by 160,000 bpd in February. March may be worse, if Saudi’s oil exports to China next month are any indication.

This decreased fuel demand has caused at least one trading arm of independent Chinese refiner Tianhong Chemical Co to go into receivership this week after feeling the coronavirus pinch. While this is just a single instance of an oil trader going under due unfavorable market conditions courtesy of COVID-19, the development is cause for alarm. Is this just the first of many in China’s independent oil arena to go under?   Related: The Perfect Storm Sends Natural Gas Crashing

This would spell disaster for China, and be painful for any of China’s many crude oil suppliers. After all, it is these independent refiners—the teapots—that have driven most of China’s oil import growth in recent years. Crude suppliers that would feel the pain of China’s refining industry meltdown would naturally be Russia, Saudi Arabia, Angola, and Iraq—who together represented 55% of all China’s crude oil imports as of 2018.

Saudi Arabia, for example, typically ships between 1.8 million bpd and 2 million bpd, but already for March the Kingdom is cutting its oil exports to China by 500,000 bpd as refineries are throttling output. 

But smaller suppliers, too, would be hit, particularly countries that ship most of their oil to China—countries like Iran, for example, which ships 50-70% of its oil to China.

Where We’re Headed

So things are bad, but surely the virus has run its course? 

Nothing could be further from the truth. US health officials warned Americans this week to roll up their sleeves, pull up their bootstraps and settle in, because the coronavirus is on its way.

“It’s not so much a question of if this will happen anymore but rather more of a question of exactly when this will happen,” Nancy Messonnier, director of the National center for Immunization and Respiratory Diseases said in a press briefing this week.

And if you want a preview of what’s to come, you only need to look at how major institutions such as the federal reserve are behaving.  

The Federal Reserve and other central banks are expected to act soon—as early as this weekend—to staunch the market bleeding in the financial markets. The Fed’s have suggested that they will indeed cut rates “if” a global pandemic were to develop. Related: This Country Is A Safehaven In An Unstable Middle East

About that “if” scenario, Moody’s Analytics yesterday suggested that the risk of the current coronavirus outbreak turning into a pandemic has actually doubled from 20% to 40%, calling their previous assumptions that COVID-19 would be contained to China as “optimistic”.

This pandemic, Moody’s said, would result in a global recession during H1 2020.

““The economy was already fragile before the outbreak and vulnerable to anything that did not stick to script. COVID-19 is way off script,” Moody’s said.

And Moody’s isn’t the only one who is rethinking their former optimism about the deadly virus.

The IMF is likely to downgrade its global growth projections due to the virus, according to an IMF spokesperson on Thursday. And no doubt, because lethal viruses tend to scare people away from mingling among the potentially sick at places such as malls and other public areas—a situation that naturally lends itself to serious stifling of economic activity. And all that economic stifling will have a profound effect on industry, and industry in turn will have an effect on oil demand. 

The IMF is now warning that there is the potential for greater economic fallout, and it is cutting its forecast for 2020 global growth by 0.1%.

Rystad, too, stepped into the doom-spreader game on Friday, warning that the virus outbreak could cut oil and gas industry investments by $30 billion and could delay oil platform deliveries slated for Asia by three to six months. Those hit hardest would likely be shale operators in the US, and offshore E&P companies, according to Rystad. 

Rystad doesn’t see the situation on the road to improvement. In fact, it sees the situation worsening in March, and affecting the entire global service industry.

Overall, travel restrictions, reduced industrial throughput, people staying home because they’re scared—these factors have not peaked, and when they do, they will dent oil demand even further. Already WTI has sunk below $45, with Brent below $50. And OPEC may lack the fortitude to cut enough production to offset the major demand losses.

It’s not out of the realm of possibility to suggest that more pain is on its way to the oil industry in the months that follow. The only question is, how painful will it be.

By Julianne Geiger for Oilprice.com

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  • Aceof Spades on March 06 2020 said:
    Last Friday I attended a benefit that was organized by a group of doctors and sure enough many discussions concerned the coronavirus. To make the long story short, all the doctors I talked to agreed with me that the only possible way that COVID-19 could have been stopped in China…a country so densely populated…is through a vaccine. How is it possible for only a few hundred thousand to become infected with a highly contagious virus in a country of nearly 1.4 billion people? The other possibility is that China is lying about the number of cases, but Tim Cook doesn’t think that China is lying and I believe Tim.

    So the virus is effectively stopped in China, and Mr. Cook has confirmed it. An effective vaccine can certainly stop this highly contagious virus. Nothing else can….because COVID-19 can be spread by people without symptoms…which makes it much more contagious than the flu.

    Mr. Cook has thousands of employees in China…and access to hundreds of millions of e-mails between Chinese people on a daily basis. The only way he would make such a definitive statement about the state of COVID-19 in China is if he knew for a fact that China has already been vaccinating its people.

    There is only one explanation for China already having tens of millions of doses of vaccines: COVID-19 was engineered in a bio lab.

    The release of the COVID-19 was not accidental... but guess what....it was not ordered by China... but it was from a Chinese bio lab... and this lab also had the capability to make vaccines from day zero. Clearly there was foul play.

    So why would anyone do this? Why would an operative inside a Chinese bio weapon lab unleash the virus in order to force China to vaccinate its population against a virus made in China's labs?

    Well, I have my opinions as to who did it and why. What is certain is that those responsible for this evil plot will easily triple their net worth.

    So, China is pretending to be working on vaccines that it already has, and soon Xi will lie to the world that they finally succeeded in making a vaccine….because China doesn’t want to look bad and admit to what has happened. China is acting exactly how the “illuminated architects” responsible for this COVID-19 calamity have predicted China would behave.

    Meanwhile, innocent people are dying all over the world.

    The year of the rat indeed.

    It should also be noted that if we're going to change the rules on how we determine the mortality rate from the coronavirus, then we must also change the rules for how we calculate it for the Flu. Just like the cases of coronavirus are under-reported, so are the cases of the flu under-reported. The most important parameter we should be after is the comparative mortality rate between the flu and COVID-19. So, if the flu is at 0.1% mortality rate based on cases reported with significant symptoms, then COVID-19 is at 3.5% and climbing.

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