Impact of Wuhan coronavirus on oil demand and oil price

The ongoing coronavirus outbreak and subsequent large-scale quarantine measures are posing a major economic risk to China and beyond, according to Wood Mackenzie. ‘With respect to the impact on oil demand, as preventive measures focus mainly on aviation and public passenger transport, jet fuel will be the most susceptible. The experience during the 2003 SARS outbreak suggests a severe and one-off impact to China’s demand for jet fuel and, to a lesser degree, gasoline and diesel,’ notes consultant Yujiao Lei.

‘Although the Chinese government has been taking action more swiftly in a more determined manner than in 2003, Chinese domestic and international transport activity is incomparably higher today and thus the impact may be larger. For 1Q2020, China’s oil demand could be reduced by over 250,000 b/d. Taking into account adjustments to other regions for separate reasons also, we have adjusted 1Q2020 world oil demand lower by 0.5mn b/d. We expect oil demand to gain strength and start to recover after the first quarter, especially in the second half of 2020.’

The nature of currently implemented preventive measures, and China’s oil demand trajectory during the SARS epidemic in 2003, has led Wood Mackenzie to the following viewpoints regarding the possible impacts of the current outbreak.

• The ongoing coronavirus outbreak will likely be a one-off event, with its effect on oil demand focusing mainly on jet demand principally in China and to a lesser degree in East/Southeast Asia. The impact on the other regions will likely be relatively modest.

• Chinese overseas travel increased from 20mn in 2003 to around 150mn in 2018 in terms of person-times. In 2018, Asia (predominantly East/Southeast Asia) accounted for nearly 90% of Chinese overseas travels. According to a recent survey more than half of Chinese overseas travellers prefer group tours, so the ban on tour packages will severely restrain the number of Chinese visitors to popular destinations in East/Southeast Asia, such as Japan and Thailand.

• Gasoline demand will likely be less affected by travel restrictions per se, except in the areas where the use of cars is restricted as a preventive measure against the epidemic. Gasoline demand, though, will likely be more susceptible to precautions taken voluntarily by consumers and businesses to avoid large crowds. People’s reluctance to spend time in crowded areas could restrain retail businesses and social events, further discouraging consumers from making trips. Besides, many companies are encouraging telecommuting to their employees, further reducing the need for driving.

• As the imposed transport restrictions focus principally on public passenger transport, the impact on freight transport will likely depend on overall industrial and economic activity in China. If the severe transport restrictions such as those implemented in Wuhan linger, they could also restrain the affected local economy. Clusters of automotive manufacturing and high-tech industries are located in Wuhan, while Hubei Province accounts for over 4% of China’s GDP. Meanwhile, China’s diesel demand is led principally by road freight, and unlike in 2003 when China was in the middle of resource/materials-intensive industrialisation, road diesel demand has been weakening since 2019. This weakness would be exacerbated by a slowed economy.

• The impact on the use of petrochemical feedstock will likely depend mainly on the overall status of manufacturing as well as private consumption. Since China is a net importer of ethylene/propylene derivatives, if China’s domestic petrochemical demand slows, it could lead to a reduction in imports of petrochemical goods, affecting global operation of derivative exporters to China.

Based on the viewpoints above, Wood Mackenzie currently expect China’s total in-land oil demand (excluding the marine sector) to grow by 150,000 b/d year-on-year in 1Q2020, a downward revision by over 250,000 b/d from its previous outlook in early January 2020. For jet, gasoline and diesel/gasoil combined, in particular, demand is expected to fall by 100,000 b/d in 1Q2020. The low growth in total demand compares with annual average growth for China of over 300,000 b/d in 2019.

Based on the assumption that the current outbreak will be largely contained within the coming few months, China’s total demand is expected to gain strength especially in the second half of the year, led mainly by petrochemical feedstock. For 2020 in total, Wood Mackenzie’s current forecast is for the coronavirus to lower its forecast for global oil demand by more than 100,000 b/d on an annual average basis to a projected gain of 1.2mn b/d for the year, but the risks are ‘clearly on the downside’, it notes.

Oil price impact
Meanwhuile, coronavirus is ‘trumping’ the Middle East’s impact on oil prices, according to GlobalData. Following the news that the United Arab Emirates had confirmed the country’s first case of the Wuhan coronavirus – the first confirmed case in the Middle East – John Bambridge, Features and Analysis Editor at GlobalData, says: ‘The Gulf region, and Dubai in particular, is a major travel and business hub between Asia and Europe. Its links with China have been an important part of the region’s development in recent years. As headlines have laid bare the spread of the Wuhan coronavirus, global oil prices fell as low as $58.35/b in early trading on 27 January. This steep climb-down, from a high of $68.9/b on 6 January, demonstrates how demand-side considerations in Asia and particularly China – and the threat of a potential pandemic in the region – have risen to the fore.’

He continues: ‘Coming amid the shutdown of Libyan oil production and a fresh missile attack on the US embassy in Baghdad, the coronavirus-linked drop in oil prices illustrates the now perennial underweighting of Middle East risk. Repeated incidents over the past 12 months have caused only brief spikes in the oil price, with little lasting impact. Despite the geopolitical situation, prices have remained depressed on the back of underlying assumptions about supply and demand conditions. By historic standards, oil prices have stayed low amid the Middle East’s heightened tensions, which have brought the region the closest to open military conflict this side of a decade.’

‘The market response to the health crisis in China is highly reactionary in nature, given that it is not yet clear how deadly the disease will be and what the long-term impacts on the Chinese economy and commodities could be. Beijing’s measures to curtail the spread of the virus will undoubtedly impact economic activity and growth in the short-term, but it is far more speculative to make assumptions about the longer-term impacts. What has been made overwhelmingly clear, however, is the degree to which oil prices are being driven by demand-side indicators, and the extent to which effects on the Chinese economy in particular are able to influence oil prices over and above destabilising events in the Middle East.’

Figure 1: China oil demand year-on-year change
Source: Wood Mackenzie