Coronavirus to have more effect on oil market than previous ones
The analysis of UK-based Capital Economics suggests that it is difficult to square the coronavirus-led sell-off in oil markets with the fundamentals.
“Instead, we think the move is rooted in a marked deterioration in investor sentiment which, if signs emerge that the virus is being brought under control, could quickly reverse. Industrial commodity prices have nosedived since the outbreak of the coronavirus in China, with oil prices down by around 8 percent at the time of writing. We don’t have any special insight on how the virus may spread, or how severe it will prove to be. However, the outbreak of SARS back in 2003 offers perhaps the best historical parallel that we can draw upon. Indeed, the market reaction back then was strikingly similar, with oil prices initially falling by a tenth. Therefore, in order to estimate the impact that coronavirus could have on China’s oil demand, the experience of SARS offers as good a starting point as any,” said the report.
Capital Economics said that SARS resulted in lower oil demand than may otherwise have been the case.
“On this basis, SARS appears to have shaved around 3%pts off China’s oil consumption the first two quarters of 2003. Accordingly, if coronavirus has a comparable impact to SARS, the hit to China’s oil demand could be in the region of 400,000 barrels per day (bpd),” said the company.
Clearly, the report shows that there are some major differences this time around.
“For one, China is much more integrated in the global economy than it was back in 2003, which raises the risk of spillover effects which could dent oil demand outside of China. What’s more, China’s rising share of overall global oil demand has coincided with an increased share of jet fuel and gasoline in its product mix, the two types of oil consumption most at risk from reduced air and road travel. Consequently, if anything, our approximation of the loss of demand is more likely to be an underestimate than an overestimate,” said Capital Economics.
The company believes that even with this in mind, it is hard to explain the fall in oil prices from a purely fundamental perspective.
“The blockade of Libya’s oil industry has reportedly led to a 1m bpd fall in production which should be offsetting the loss of demand from coronavirus, even if it is twice as high as we have calculated. Moreover, OPEC+ seem ready to extend, and perhaps even deepen, output cuts, which should keep supply constrained for a while yet. That said, if coronavirus persists for many months, this could jeopardise the modest recovery in oil demand growth that we currently anticipate in the second half of this year,” reads the report.
In sum, there is good reason to expect a rebound in prices if the virus is brought under control, just as in 2003, according to Capital Economics.
“As a result, we are keeping our end-year forecasts unchanged for now, though much will depend on how the situation unfolds over the coming weeks and months,” said the company.
The outbreak in the Chinese city of Wuhan – which is an international transport hub – began at a fish market in late December of 2019 and since then more than 130 people have died, including a doctor who was treating the victims. Some sources claim the coronavirus outbreak started as early as November 2019.
The symptoms include cough, headache, fatigue, fever, aching and difficulty breathing. It is primarily spread through airborne contact or contact with contaminated objects.
Chinese health authorities say that the majority of the people who have died were either elderly or had underlying health problems.
The virus is spreading at a rapid pace but researchers are far from finding a vaccine.
Aside from Mainland China, the cases of coronavirus spreading have also been confirmed in Thailand, Hong Kong, Taiwan, Japan, Macau, Malaysia, Singapore, Australia, the US, France, Germany, South Korea, Canada, Vietnam, Cambodia, Nepal and Sri Lanka.