Global crude oil demand could drop as much as 42 per cent to 0.77 million barrels per day (million b/d) from the current estimated 1.33 million b/d in February 2020 on a year-on-year basis if the Wuhan virus, or the crononavirus as it is also known, spreads more, says a note from S&P Global Platts.
"In the worst case, global demand growth will remain negative until May. In best case, it would bounce back to positive in March. Yet, notice worst-case is – for now – assumed recession-free. In worst-case, demand reduction would be comparable to a major slowdown. In best-case, it would be similar to a three-month warm winter effect,” S&P Global Platts note said.
The coronavirus already has financial markets rattled. While experience with virus outbreaks in the past suggests that they often bounce back quickly, the actual economic impact on China, according to analysts at Rabobank International, hinges on the ability of the Chinese government to contain the virus and its policy actions to mitigate the impact.
Already key international airlines including British Airways, Lufthansa, American Airlines, United Airlines, Swiss International Air Lines and Austrian Airlines, suspended or reduced flights due to the outbreak. The virus has now impacted over 7,711 people globally, with cases emerging in India, the US and Europe, while the death toll across China has also climbed.
In its worst-case scenario, Claudio Galimberti, the head of demand, refining and agriculture analytics for Platts Analytics assumes the whole of China’s transport system will be impacted severely, with up to 23 per cent of passenger and freight trips being canceled across the country in February. It also assumes China’s aviation demand will drop by an unprecedented 50 per cent in the same period.
Source: S&P Global Platts
The coronavirus outbreak comes at a time when geopolitical risks to oil supply are likely to remain elevated in 2020, as both the US and Iran continue their maximum pressure campaigns. Sanctions relief looks unlikely before the November 2020 US presidential election, although US sanctions policy has proven unpredictable, analysts say.
Meanwhile, the Organization of the Petroleum Exporting Countries (Opec) is already in discussion to bring forward its scheduled March 5-6 meeting as the oil market continues to be buffeted by the impacts of the coronavirus outbreak, reports indicate. The cartel is considering deeper oil-production cuts, or extending its current supply curbs beyond their March expiry.
Given the developments, analysts have already revised down their forecasts for China's refinery throughput in February and March by 600,000 barrels per day (b/d) to 1 million b/d, with crude oil imports set to slow further in April and May.
“Consumption is a meaningfully more important contributor to the economy than it was in 2003 at the time of the SARS episode, and now accounts for over 70 per cent of China’s gross domestic product (GDP) growth (versus less than 40 per cent in 2003). This leads us to believe the drag on the economy may be more severe in magnitude than what we saw in 2003. However, a recovery may not be as speedy, as China’s economy is now not only much larger in size but also growing at a more modest rate than the double-digit rate experienced 14 years ago,” wrote analysts at Franklin Templeton Emerging Markets Research in a recent note.