China struggles as coronavirus takes its toll on oil markets
The spread of the coronavirus is causing major distress in oil markets, sending crude prices tumbling and forcing Saudi Arabia and fellow oil producers to consider further cutting output to stem the most recent price erosion.
Chinese oil demand has taken a solid hit and there are fears that global oil demand will weaken should the crisis escalate into a pandemic.
As China struggles to contain the deadly virus, the Asian giant’s economy is being battered with travel, tourism and manufacturing sectors experiencing steep losses.
China’s annual growth rate could fall to less than 4% in the first quarter even if the spread of the virus is swiftly controlled and annual growth for 2020 might not reach 5% — falling short of the Chinese government’s target of 6%.
China is the world’s largest oil importer and second-largest oil-consuming nation, which means a sudden change in its energy consumption has far-reaching implications. It is estimated that the coronavirus outbreak is causing Chinese oil demand — crude and refined products — to drop more than 3 million barrels per day (bpd), the equivalent of 20% of the country’s oil consumption.
Chinese demand for jet fuel, petrol and diesel is feeling the pinch from the cancellation of thousands of flights to and from China and travel restrictions by air or road in and out of the Asian country’s most affected regions.
State Chinese refiner China Petroleum and Chemical Corporation is reducing throughput at its refineries by 600,000 bpd — 12% — in February with cuts possibly extending into March. China stopped shipments of crude from Latin American suppliers while slowing supplies from West African producers.
International crude prices experienced their worst January collapse since 1991, with US benchmark crude West Texas Intermediate (WTI) sliding 16% during the month, closing at $51.56 a barrel on January 31. British crude benchmark Brent settled at $58.16 a barrel that same day, a 12% drop over the month. The price for WTI was $49.61 on February 4, less than the $50-per-barrel threshold considered a psychological redline for many oil producers.
China has cut crude deliveries from Saudi Arabia, its largest supplier, for March. Riyadh supplied China with 1.67 million bpd of crude in 2019, followed by Russia at 1.55 million bpd.
Oil markets are looking to Saudi Arabia, the de facto leader of OPEC, and Russia to see what corrective action it will support to stem the rapid price collapse.
Riyadh and Moscow have been the key decision makers in the collective of oil producers known as OPEC+ that collaborated over the past three years on elevating prices and stabilising oil markets. In December, the OPEC+ group agreed to deepen its output reductions by another 500,000 bpd to remove a total of 1.7 million bpd of crude from the markets through March.
The price plunge is leading the group to consider moving up its scheduled March 5-6 ministerial meeting in Vienna. The difficulties the oil producers face are not knowing how far geographically the coronavirus will spread and how long it will last, making demand forecasts all the trickier.
Referring to the effect the coronavirus has had on demand, Iranian Oil Minister Bijan Zanganeh said on February 3 that “The oil market is under pressure and prices have dropped to under $60 a barrel and efforts must be made to balance it.”
OPEC+ technocrats met in Vienna to discuss the market crisis to provide delegations with their recommendations for moving forward, including the need for an earlier ministerial gathering. The sessions included a presentation by Wang Qun, China’s ambassador to the United Nations, and other international organisations. Wang said he cautioned the technocrats not to overestimate the effect of the coronavirus threat, adding: “There is no need for panic.”
The OPEC+ group could roll over existing production cuts through June, figuring the crisis is temporary and it can weather the price volatility. Saudi Arabia has been pushing for a short-term jolt to the markets with a minimum of a 500,000 bpd output reduction for the second quarter while floating as much as a 1 million bpd cut to ensure price stability. Riyadh, however, is facing resistance from Moscow and others both on the immediate need for and scope of additional output restraint.
Over the past three years, Saudi Arabia has borne the largest production cuts from the OPEC+ pacts and has routinely trimmed its output beyond its quota to compensate for other participants’ poor compliance.
Saudi oil production for January stood at 9.74 million bpd, 400,000 bpd lower than Riyadh’s quota. The kingdom, which needs $80 a barrel to balance its budget, can only hope that the spread of the coronavirus is quickly contained and that the hardest hit to China’s oil demand has already been felt.