The coronavirus outbreak in China is already impacting demand for fuel as airlines are canceling thousands of flights to China and Chinese authorities are discouraging travel by air or road in and out of the most-affected regions and have imposed a lockdown on the 11-million-resident city where the virus was first detected.
Demand for jet fuel, gasoline, and diesel is likely to be suppressed in the coming weeks, potentially prompting Chinese and other Asian refiners to cut refinery rates, analysts say.
The slowdown in China’s fuel consumption is also aggravated by an extended period of public holidays for office workers and multinational corporations—including Google, Apple, McDonalds, and IKEA, to name a few—suspending operations or shutting down offices, stores, and restaurants.
The weaker fuel demand in China is spilling over onto weakening refining margins for processing crude oil into jet fuel, gasoline, and diesel. Therefore, refiners in China—and elsewhere in Asia—are likely to slow down refinery run rates amid depressed demand and an oversupply of fuels, sources who trade, supply, or refine crude oil across Asia told Bloomberg.
If refineries cut throughputs, a secondary victim of the virus outbreak could be crude oil demand in the world’s key oil demand growth driver, Asia.
“Fears of weaker demand have weighed on refinery margins, and continued weakness could see some refineries cut run-rates in China. If we were to see this, it would likely be the independent refiners who are first to cut, given their focus on the domestic market,” ING strategists said on Friday. Related: Jim Cramer: ‘’Fossil Fuels Are Done’’
China has significantly boosted its fuel export quotas for 2020, but those quotas were handed only to large state-owned enterprises, not to small independent refiners.
The first hit comes to demand for refined products in China and across Asia, but a protracted health crisis with more travel restrictions could have a sizeable impact on China’s economic growth, which has already been weakening due to the U.S.-China trade war.
Weaker growth could spill over to the crude oil demand growth of China—the world’s largest crude oil importer and the main engine of oil demand growth in recent years.
It may not be an exaggeration to say that when China’s oil demand sneezes, the global oil market catches a cold.
The World Health Organization (WHO) said on Thursday that the outbreak is now a Public Health Emergency of International Concern, but stopped short of advising travel or trade restrictions.
“The Committee does not recommend any travel or trade restriction based on the current information available,” the WHO Emergency Committee said on Thursday, prompting a mini relief rally in oil prices early on Friday.
Yet, overall sentiment in the oil market was decisively bearish for a second consecutive week, despite a massive loss of crude oil supply from Libya.
Analysts are still struggling to quantify the impact of the virus outbreak on the Chinese economy and on oil and fuel demand, and the unknowns are unlikely to clear up over the next few weeks.
According to S&P Global Platts Analytics, oil demand could drop by 200,000 bpd over the next two to three months. This demand erosion would represent around 15 percent of the expected oil demand growth this year. But if the coronavirus turns out to be as deadly as the Sudden Acute Respiratory Syndrome (SARS) was in 2003, then crude oil demand loss could be in the region of 700,000-800,000 bpd—more than 50 percent of the oil demand growth estimate for this year, S&P Global Platts Analytics says. Related: Is Egypt’s Energy Hub Dream Falling Apart?
As per IHS Markit estimates, the potential maximum economic impact of the coronavirus on China’s economy—based on a benchmark using the SARS economic impact in 2003—could be a 1.1-percentage-point reduction in Chinese economic growth from the baseline IHS Markit forecast of 5.8 percent growth this year.
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“Mainland China’s impact on the world economy is also much larger now than during the SARS outbreak, meaning the slowdown in Chinese growth may be a significant drag on global growth,” IHS Markit said this week.
Until clearer indications of the virus impact on oil demand emerge, the market will continue to be weighed down by fears of sizeable demand destruction.
“This thing still in the process of rearing its ugly head and that’s why oil is taking this so hard because this could really turn into an acute drop in demand at least for a time,” John Kilduff, partner at Again Capital LLC, told Reuters this week.
By Tsvetana Paraskova for Oilprice.com
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Of course, demand for jet fuel, gasoline, and diesel is likely to be slightly reduced in coming weeks, potentially prompting Chinese and other Asian refiners to cut refinery rates. This will affect China’s and global demand for crude oil.
But if the drop in oil demand is estimated at just 200,000 barrels a day (b/d) over the next two to three months, then the impact on global demand will hardly be noticeable when compared with an estimated glut of 4.0-5.0 million barrels a day (mbd) facing the global oil market resulting from two years of trade war.
Still, it is inevitable that the hysteria about declining global demand for oil will soon subside given the very strict containment measures that the Chinese government is implementing.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London