Oil demand shock following China’s coronavirus outbreak

The coronavirus is significantly impacting oil demand in China as travel by road, rail and air across the country has collapsed following quarantine measures and restrictions implemented by the Chinese government in a bid to stop the disease spreading.

According to BloombergNEF: ‘The demand shock has forced domestic refiners to cut their operation rates. State-owned Sinopec may reduce run rates by 20 percentage points, while the smaller independents are operating below 50% utilisation. The longer that the epidemic goes on and people refrain from travel, the greater the impact will be on the profitability of Chinese refiners and the global crude balance. By comparison, the SARS [severe acute respiratory syndrome] outbreak in 2003 caused air passenger numbers across East Asia and the Pacific region to decline by 2.3% year-on-year.’

Meanwhile, Rystad Energy notes that while coronavirus outbreak in China ‘will curb global oil demand growth by at least a quarter this year’, the production cuts of 600,000 b/d proposed by an OPEC+ committee are ‘far from enough to balance the market’. Its analysis indicates that both the first and second quarters of 2020 will see global oil production surpluses. ‘Our estimate shows that the first quarter of the year will see producers left with a stock build of 700,000 b/d. Our previous estimate was for a more or less balanced first quarter with a 100,000 b/d surplus. The second quarter threatens to build oil stocks by 1.3mn b/d unless production is reduced further. That means that even if the OPEC+ output cuts are implemented in the second quarter, there will still be a sizeable surplus of 700,000 b/d.’

‘The economic shut-down in China will cause the largest negative oil demand shock since 2008. Even though the chaos unfolding in Libya has wiped out most of its oil production, and even if OPEC’s output cuts are fully applied, they will not be enough to fill the demand gap now exacerbated by the coronavirus,’ says Bjørnar Tonhaugen, Rystad Energy’s Senior Vice President and Head of Oil Markets.

Wood Mackenzie expects the coronavirus outbreak to have a much bigger impact on China’s petrochemicals industry than the SARS outbreak in 2003. Principal Consultant Kelly Cui says: ‘We believe the market should recover from late 2Q2020, mimicking the post-SARS trend of a bounce in demand for consumer goods. However, given the tighter restrictions on transport movement, delayed recovery in operations and higher rate of contagion compared to SARS, the coronavirus outbreak will have a greater impact on all markets – including petrochemicals.’

Wood Mackenzie notes that sluggish demand from end-use plants and restricted transportation are forcing upstream feedstock plants to lower their operating rates. It reports that Sinopec-SK Wuhan Petrochemical – the only petrochemical plant located in Wuhan – has lowered the operating rate of its 800,000 t/y cracker by 10%. A 300,000 t/y cracker expansion in this plant, scheduled for completion in July, will also have to be delayed.