Tuesday, May 21, 2024
 
 

Impact of coronavirus on oil and gas markets

EPA-EFE//ALEX PLAVEVSKI
A woman in the Chinese city of Guangzhou wears a mask protective mask in an attempt to shield herself from being exposed to the coronavirus contagion. Nearly 30,000 people have already been infected by the deadly virus worldwide. 

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The World Health Organisation first heard of coronavirus on 31 December. At that time the price of Brent crude was about $68/bl. It has since been tumbling down, but by February 4 it appeared to have stabilised at about $55/bl and on 6 February OPEC+ recommended additional oil production cuts of 600,000 barrels per day.

Coronavirus could not come at a worst time for the global LNG trade, which is already suffering from low prices due to a glut of supplies and a slow-down in demand growth in Asia. This is particularly true in China, where coronavirus is hammering prices further.

China is fast-becoming isolated. Uncertainty is disrupting trade globally and depressing commodity prices, including oil and gas.

What is coronavirus?

Coronavirus is a contagious, acute, respiratory infection virus, exhibiting flu and pneumonia symptoms. By February 6 it infected over 31,000 people in 25 countries, causing 636 deaths, but with only 14 outside China’s Hubei province and only two deaths outside mainland China. WHO has declared coronavirus a global health emergency but not a pandemic.

Coming during the Lunar New Year holidays, it could have spread quite quickly, if it wasn’t for the Chinese government’s drastic action of placing Wuhan and nearby cities under quarantine and restricting travel. Despite some initial suppression of the news and delays, these measures appear to have succeeded in containing the spread of the virus, now increasing far more slowly than the 50% rate during the third week of January. Stabilisation is expected by April, with the spreading of the virus expected to stop soon after.

In the meanwhile, news abounds of vaccines being developed and getting to the testing stage. Chinese researchers cracked the virus’ genetic sequence and shared it with other scientists, enabling about a dozen research projects to progress fast. Chinese media reported on February 5 that a research team at Zhejiang University developed two new drugs that can effectively inhibit the virus. One is already in clinical trial stage in Wuhan.

Two of the more recent respiratory syndrome viruses were SARS and MERS. SARS first appeared in 2002 in the Chinese province of Guangdong, causing 8000 infections and close to 800 deaths in 26 countries. MERS appeared in Saudi Arabia in 2012, causing 2500 infections and 860 deaths in 27 countries.

If SARS could be used as a guide, the overall impact of the virus outbreak may be short lived, with a modest impact on the global economy and the commodities sector.

Impact on oil and gas

With quarantine and travel restrictions in place in much of China, and with the government ordering all businesses to remain closed up to February 10, there has been a dramatic slow-down in business activity. In addition, many flights to China have been suspended, and air, rail and road travel within China has been much reduced. These developments are impacting energy use in China, and particularly oil and gas consumption.

The country’s oil consumption in December – before the outbreak of the virus – was close to 11 million bls/day. With oil touching almost all aspects of the country’s economy, so far consumption has dropped by close to 3 million bls/day, and is expected to drop further in February, by 3.2 bls/day. BP estimates that the impact on the average global oil demand in 2020 could be 0.5 million bls/day, quite substantial when compared to the forecast growth of 1.2 million bls/day. This is impacting global oil prices, down by 20% early February.For oil this has come at a difficult time, when it is facing environmental challenges around the world, questioning its future as a global energy resource.

OPEC+ is meeting in Vienna, considering taking further measures to support the oil price. Cuts in oil production by another 0.5-1.0 million bls/day are possible. This has led to a shore-up of the oil price, arresting its fast decline. This, and news of a vaccine breakthrough, helped Brent crude climb to over $56/bl by February 6.

Any prolonged period of low oil prices could impact the global oil industry further – particularly the US shale industry which has been facing low price challenges – and reduce its ability to invest in E&P. 2019 was a difficult year due to already low prices, with many oil companies, including all the majors, reporting much reduced profits. The good news is that experience from past similar illness-related price declines shows that the impact may be limited to a period of two to six months.

However, concerns and low oil prices may persist until there are clearer indications that the virus spread is being contained. The impact on LNG prices has been equally strong. The global LNG market was already oversupplied before the coronavirus outbreak, and the expected drop in Chinese demand as a result of the outbreak is putting it under even more pressure. It is also impacting global LNG shipping.

The JKM benchmark dropped down to $3.50/mmbtu early February, its lowest level for more than a decade. This prompted Shell’s CEO, Ben van Beurden, to say “It is a very concerning development, a lot of people will be anxious, and of course we are monitoring very closely what is happening.” Shell is the world’s largest LNG trader. In January it reported a 23% drop in its 2019 profits due to low global oil and gas prices.

This is also impacting gas prices in Europe, down to $2.70/mmbtu on February 5. Europe is already flooded with gas due to mild weather lowering demand, but also due to diversion of surplus LNG from Asia.

China’s LNG importers are considering extreme measures, such as reselling cargoes and even declaring ‘force-majeure.’ It remains to be seen when the virus will be contained, but there are hopeful signs. Certainly the stock market seems to think so.

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