Oil & Gas
Coronavirus Erodes China's Demand
February 2020
The deadly coronavirus has eroded China's demand for oil as entire cities are quarantined, passenger travel is restricted and factories extend closures following the lunar new year break.

Brent crude traded up to US$70.7/bbl in early January after a US air strike killed a top Iranian military commander in Iraq, prior to plummeting some 17% to US$58.7/bbl by month end, the largest decline in 30 years as the World Health Organization declared a Global Health Emergency (GHE) as the coronavirus outbreak worsened. Similarly, WTI climbed to US$63.9/bbl before it collapsed to US$52.9/bbl. Crude oil markets are expected to experience further downward pressure as the coronavirus outbreak dampens consumer demand and disrupts supply chains.  

After the lowest summer US natural gas prices since 1998, the market has continued to fall this winter as warmer-than-average temperatures have dented consumer demand for power and heating. Henry Hub natural gas prices continued to slide on December’s decline, trading in the range from US$2.28/MBtu to US$1.83/MBtu, a 20% decline.

Countering this, events in Iraq increase uncertainty around potential disruptions to oil production and shipping in the Middle East, adding volatility and an additional risk premium to global oil prices in the short term. Upward pressure on prices is also expected as OPEC+ will most likely make further cuts, as well as an increasingly positive outlook on the US-China trade dispute. Henry Hub prices can expect to see some lift in 2021 because of reduced natural gas production that stems from current low gas prices. However, falling demand for natural gas should limit upward price movements.

Sinopec Corp, Asia’s largest refiner, cut throughput from its facilities by about 600,000 barrels per day (bpd) in January as the coronavirus hits fuel demand. Independent refineries in Shandong province, which collectively import about a 20% of China’s crude, cut output by 30% - 50% in a little more than a week. Travel restrictions and extended shutdowns of large parts of the Chinese industrial sector have weighed on oil demand.

PetroChina, China's second-biggest state refiner, plans to reduce its crude throughput by 320,000 bpd this month, a company official said Monday. PetroChina's planned February cut is equivalent to about 10% of the refiner's average production rate of around 3.32 million bpd. This would bring total production scalebacks by state refiners, include Sinopec Corp and China National Offshore Oil Company, to around 940,000 bpd for this month. The cuts from PetroChina are likely to be deepened to 377,000 bpd in March, said the senior company official

An advisory body to OPEC and its allies has recommended an additional oil output cut of of 600,000 bpd in order to support prices as demand continues to erode from the coronavirus outbreak. The technical committee met in Vienna for three days last week and concluded that producers should make supply curbs of 2.7 million barrels a day for the first half of 2020. This figure includes the December deal which cut output by 2.1 million bpd, combined with an additional cut of 600,000 bpd.  OPEC+, which produce more than 40% of global oil supply, will convene in early March to decide whether to enforce the technical committee’s recommendations. 

AME’s 2-year forecast for global oil prices anticipates a marginal price recovery as the explosive growth in US shale production eases, mostly as a result of major US shale operators prioritising investor returns ahead of production growth.
There is also an expectation, assuming abatement of the cornavirus, that global economic conditions in 2020/2021 will be better than previously anticipated, following the signing of an initial trade deal between the US and China in January.