By Sonny Atumah
Like a tsunami, the disease caused by novel coronavirus has come ravaging and raveling. The World Health Organisation last Tuesday christened the disease COVID-19. The World Health Organization said it chose a name for the disease that does not refer to places, animals or people to avoid stigma.China had recorded over 1113 deaths from the coronavirus. The confirmed coronavirus cases reported has reached 45,000 in 25 countries with one death each recorded in Hong Kong and the Philippines on Wednesday. Moreover, where do we go from here with this global emergency as it is happening in China? The WHO’s director-general, Dr. Tedros Adhanom Ghebreyesus, said the greatest concern was the coronavirus’ potential spread to countries with weaker healthcare systems, and assured that its objective is containment. Chinese President Xi Jinping told his people they “must have confidence” that China will win its battle against the epidemic.That statement indeed inspired confidence. China has developed a mobile app “close contact detector,” to check whether one is at risk of catching, the coronavirus by entering ones name and ID number to find out whether there has been close contact with someone infected.
The disease originated at a market in Wuhan, a city of over 11 million people is one of China’s largest industrial and transport hubs, where several Chinese and international corporations have business operations. An economic lockdown from coronavirus will affect industrial production, a driver for Chinese growth. Nevertheless, the health emergency has a considerable impact on China’s economic growth, which has been weakening due to the trade war between the United States and China. Analysts fear is over destroyed demand in China and broader economic damage from the mass quarantine. Although Chinese Government is trying to be, ascertaining the extent of the health crisis on the economy, there is no doubt that it will greatly affect the oil and gas demand in China.There is a correlation between China’s oil demand and the global oil market. Reuters reported that China imported more than 10 million barrels of oil per day in 2019, making it the world’s biggest importer with about 10 per cent of total global oil production.China relies heavily on oil imports to keep its fast-growing economy and move its extremely large population.
Global investors and traderscontinue to worry over the dreaded virus spreadasoil prices wentinto the bearish mode early last week. A bear market is associated with a drop of 20 per cent from previous highs.On Tuesday, the two benchmarks, the West Texas Intermediate, WTI, which tracks North American crude grades, closed at US$49.94, whileglobal benchmark, the Brent traded at US$54.01. Although the Brent rallied by 4.28 percent to US$56.32 andWTI by 2.46 percent to US$51.17on Wednesday, overall, the benchmarks slid byUS$11 since the beginning of the year. It was obvious that oil prices have plunged by nearly 21 percent over the past month from the closing high of US$63.27 on January 6 when tensions escalated over the killing of Iranian intelligence chief by American drone. Commerzbank analysts however, underscore the point that there was already a slight over supply in the oil market in January before the coronavirus outbreak in China.The American Petroleum Institute (API) estimated on Tuesday, a crude oil inventory build of 4.18 million barrels for the week ending January 31, compared to expectations of a 2.8-million-barrel build in inventory.
The Chinese government order that all businesses closed until February 10 have discouraged or banned travel in the areas most affected by the virus. With airlines suspending routes to and from China, the demand for jet fuel has dropped. There is now an oversupply of refined petroleum products including gasoline, diesel and jet fuel from refiners because of travels advisories using cars, buses, trains or airplanes. Airlines are canceling thousands of flights to and from China. Chinese refiners are grappling with weak fuel demand at home and elsewhere in Asia. This month, China Petroleum and Chemical Corporation, or Sinopec, which is the largest oil refiner in Asia, cut its refinery throughput by 600,000 barrels per day, bpd, 12 percent of the corporation’s 5-million-bpd average fuel production for last year, according to Reuters. Independent refiners have reduced refining capacity by half because of the regulation prohibiting from exporting refined products.
As a result, oil demand in major Chinese trading hubs, may drop by 500,000 barrels per day. This appears to be the worst oil demand shocks since the financial crisis of 2008-2009. Oil majors are now searching for spot buyers of crude oil outside China, with some buyers asking to delay buying, Bloomberg reported.The Chinese case that is resulting in a bear market is demand driven and not the case of oversupply of crude that brings price down.Will OPEC respond to the fast drop in prices appropriately? OPEC’s Monthly Oil Market Report published on Wednesday brought its global oil demand growth estimate down to 990,000 bpd. Its estimate of demand for OPEC crude was loweredby 200,000 bpd to 29.3 million bpd. The coronavirus outbreak, which is crippling oil demand, is the major reason for lowering the demand growth forecast. Last week’s OPEC+ panel meeting saw OPEC’s largest producer Saudi Arabia pushing for more cuts, while Russia the leader of the non-OPEC group of producers’ pushing back. OPEC needs cooperation.