It impairs your breathing, causes extreme fatigue and fevers. It kills. And beyond that, it’s keeping oil prices low by threatening to stifle oil demand in one of the world’s largest oil markets.
It’s SARS CoV, better known as the SARS Coronavirus, and it’s shaping up to be the oil market’s biggest nemesis this year. And there’s no cure.
SARS, which stands for severe acute respiratory syndrome, is not only deadly, but highly contagious—more contagious than originally thought, and this coronavirus-inspired fear has now decisively spilled over into the oil market.
Perception is Reality
With highly contagious and deadly viruses like the SARS CoV, fear rules the day. Whether it’s a personal fear that one might catch the virus, or whether one actually catches the virus, the result is that people will stop traveling to some extent.
Even the fear that people may stop traveling is enough to result in an economic slump. Whether one catches the virus or not is irrelevant economically speaking—the mere perception that it’s a possibility creates ripples in the world economy as people change traveling, purchasing, and trading patterns.
The Oil Market’s China Obsession
The oil markets are obsessed with China – specifically China’s demand for oil.
Oil demand was at the forefront of all the pricing moves throughout 2019. The thought of dampened demand from the world’s second largest oil consumer outweighs even significant geopolitical risk, as well as tangible oil production outages such as the attacks on Saudi Aramco oil facilities in September and Libya’s current nearly complete outage of over 1 million barrels per day.
One may look at China’s oil consumption, at 13.5 million bpd in 2018, as being far below that of the United States, which consumed 20.5 million bpd that same year. So, why all the China fuss? Surely U.S. demand would move markets more than China? But it’s the oil demand growth that moves prices, and China’s oil demand growth (and India’s too) is far greater than that of the United States. In fact, China’s oil demand has been growing at an annual rate of 5.5%, while the United States’ oil demand has been growing by 0.5%.
And most of what China uses, it imports, adding another layer of market-sway into the mix.
This is what moves markets.
Not even OPEC and its jawbone to herald its oil production-cut prowess can outshine negative news about what is already China’s slowing demand growth.
And of all the threats to the oil industry that people were expecting in 2020, no one saw this coming: the virus ripping through China at unprecedented rates is eating into China’s oil demand more than anyone could have ever expected.
Every aspect of the economy hits the oil market. But of particular note is the effect the virus could have on travel, which would affect air travel and road travel, impacting jet fuel and gasoline consumption. And with the persistent robust supplies that are loitering on the market today, slack demand couldn’t come at a worse time.
All of this at a time when the oil market was hopeful of an increase in demand thanks to the Chinese New Year holiday that typically sees an uptick in travel and gift giving.
Against this perceived and real demand impact, OPEC will be mostly impotent, even with Libya’s million-barrel-a-day loss and Saudi Arabia’s overproduction.
History Repeats Itself—or Worse
SARS CoV could have the same effect on the oil market as the original SARS outbreak back in 2002, which saw the price of oil dip by 20%.
Goldman Sachs said that if it mimics the last virus-induced supply shock, the oil market could see a drop of 260,000 barrels per day in the global oil demand market—170,000 bpd of which would be in the form of jet fuel.
This loss, Goldman predicted earlier this week, could see oil prices fall by $2.90 per barrel, but oil prices have already fallen more than $4.50 per barrel over the last few days alone, with the Brent benchmark falling to $61.41 on Thursday from $65.95 on Monday. And this is despite major oil production outages in Libya.
We’re Already Seeing the Effects
Already the ramifications of the new virus are taking hold, disrupting everyday life.
In China, movie releases have been pushed back, tourist attractions including the popular Forbidden City are scheduled to shut down this weekend, and people are already cancelling travel plans, according to the New York Times.
The question isn’t whether the virus will depress oil demand; rather, the question is how much it will depress oil demand. And it’s hard to ascertain the true effect, because China isn’t necessarily transparent in just how the virus is progressing, with the New York Times suggesting that Beijing is erasing information that doesn’t toe the country line.
What we do know is that on Thursday, China officially suspended travel to and from other cities near Wuhan—the origin city.
The travel restrictions will affect tens of millions of people. Flights, trains, buses, subways, ferries, and for-hire cars have also been suspended—all of which will have an immediate effect on fuel consumption.
The death toll of the virus has now climbed to 26, with 900 reportedly infected.
Fri, 01/24/2020 – 10:00
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Author: Tyler Durden