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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Oil Tanks On Fears Of Global Economic Crisis


Global equities fell sharply on Monday as fears over the spread of the coronavirus spiked once again, with new cases spreading beyond the borders of China. The Dow Jones plunged by more than 900 points and oil prices slumped nearly 5 percent.

Several countries reported new cases of the virus, including Iran, Italy and South Korea. Roughly 29 countries have reported cases, although mostly in small numbers as of now. But the World Health Organization warned that the “window of opportunity” to head off the spread of the virus could be closing.

One of the more concerning developments is that coronavirus cases are popping up in people who haven’t traveled to China or who have come in contact with confirmed cases, which shows that “it’s not clear how the virus is spreading,” a spokeswoman for the WHO said. “We're seeing some cases that don't have a clear epidemiological link.”

The U.S. Centers for Disease Control and Prevention (CDC) warned that “more cases are likely to be identified in the coming days” in the United States, although it said that the “immediate health risk” is “low.” Still, the CDC said that if virus began to spread in earnest in the U.S., “public health and healthcare systems may become overloaded.”

Finance ministers from the G20 acknowledged the threat to the global economy as they gathered in Riyadh this week. The IMF cut its growth forecast for China from 6 percent to 5.6 percent. The Fund cut its global GDP growth estimate by 0.1 percent, but said that the impact could be much larger if the coronavirus spreads or lasts longer.

The Wall Street Journal reported on the extensive congestion at Chinese ports, with cancellations of dozens of cargo ships. Some container ships are departing China at only 10 percent full, not even enough to cover fuel costs. Related: Oil Prices Tumble 4% As Coronavirus Demand Shock Spreads

China’s oil demand has already suffered a huge blow, so the prospect that other countries might start implementing various forms of lockdown procedures raises even more questions about demand.

“We should not underestimate the economic disruption, as a super spreader could trigger a massive drop in business activity around the globe of proportions the world has never dealt with before,” Stephen Innes, chief market strategist at AxiCorp, wrote in a note.

Raymond James put out an updated estimate on February 24, forecasting a hit to global oil consumption on the order of 1.5 million barrels per day (mb/d) for the first quarter. It assumes the situation improves in the second quarter, with demand 1 mb/d lower than might otherwise be the case had the virus not occurred.

Raymond James acknowledges that it cannot rule out “the prospect that international travel grinds to a halt not only to/from China, but in other regions as well…but at this point it seems premature to paint such a dire picture.” The investment bank lowered its 2020 Brent forecast to $65 per barrel, but says that the market will tighten up next year, pushing prices up to $80. Related: Oil Rig Count Inches Higher In Coronavirus Plagued Markets

However, everyone keeps assuming the virus clears up pretty quickly. But as the spread of the virus to Italy and Korea demonstrate, the crisis could continue to grow worse.

“Accordingly, there is a greater need for OPEC and its allied non-OPEC producers to cut production more sharply,” Commerzbank wrote in a note on Monday. “However, the alliance between Saudi Arabia and Russia appears to be hanging in the balance due to the virus-related decline in demand.”

OPEC+ is scheduled to meet at the end of next week, but disagreement between Russia and Saudi Arabia adds a dose of uncertainty to the outcome of that meeting. In recent weeks, cuts on the order of 500,000 or 600,000 bpd seemed to be all but a foregone conclusion.


Now, Saudi Arabia is reportedly in talks with the UAE and Kuwait on a joint cut of about 300,000 bpd. Unable to count on Russia, the Gulf States may act on their own, although it’s not clear that the move will be sufficient.

By Nick Cunningham of Oilprice.com

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  • Mamdouh Salameh on February 25 2020 said:
    Forecasts about declining global oil demand and China’s as a result of the coronavirus outbreak are changing from day to day with oil prices reflecting these changes.

    The outbreak is creating uncertainty in the global economy not dissimilar to that created by President Trump’s war on China between March 2018 and December 31, 2019 though it is worse in its effect from the point of disrupting global economic activity.

    Aside from the very strict measures being implemented in China and around the world to combat the outbreak, both the global economy and the oil market can only wait to see where it will end.

    However, one thing to guard against is exaggerated and outlandish estimates of loss of oil demand by the global oil market.

    The reported extensive congestion at Chinese ports is a manifestation of the very strict measures China is implementing to contain the outbreak. However, once the outbreak is declared under control, global oil demand and prices will recoup all their recent losses and more. Moreover, China’s economy will most probably behave like someone who has been starved of food. Its appetite for crude oil will be rapacious with oil imports surging to the levels it hit in the last quarter of 2019, namely 11.76 million barrels a day (mbd).

    And while I fully understand the desire by Saudi Arabia and some other members of OPEC to deepen the production cuts to arrest the decline of oil prices, any such action whether by the organization as a whole or by Saudi Arabia, UAE and Kuwait will be a total waste of time and futile as it will have no effect whatsoever on oil prices while the outbreak is raging. It will only lead to a loss of market share. Furthermore, Russia doesn’t see any benefit from deepening the cuts at the current situation.

    Those analysts, investment bankers and commodity traders who like the International Energy Agency (IEA) are so keen for OPEC to deepen their production are not motivated by their care for the welfare of OPEC members but by their own political agenda. Cutting more of OPEC’s production will lead to a reduction of its share in the global oil market and a weakening of its influence.

    Still, why don’t they ask the United States to cut its production instead. After all the US Energy Information Administration (EIA) in cahoots with the IEA and Rystad Energy never stop hyping about projected increases this year in US shale oil production.

    Even if global oil demand is slashed by 1.0 mbd because of the coronavirus outbreak, global demand is still projected to reach 101.43 mbd in 2020 compared with 101.23 mbd in 2019 as things stand currently.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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