The first priority in addressing the coronavirus is preserving global health. Lessons from the past show that the herculean task requires timely and credible action by governments, coordinating leadership from the World Health Organization, and constructive cooperation among nations. But as containment of the respiratory illness continues to face uncertainties, the fallout of the coronavirus is spreading beyond national and global health systems into the economic sphere. The coronavirus has also taken center stage as a black swan in global oil and gas markets, and first signs are that its influence could be dramatic. Depending how long the health crisis lasts, it is worth considering whether there could be larger ramifications than just a few weeks of market volatility.
Many analysts are referencing the Severe Acute Respiratory Syndrome (SARS) epidemic of 2003 in thinking about how long and how extensive the outbreak could be on international travel. Studying similar past events can often provide clues for how a new black swan event can accelerate or decelerate existing trends. One unexpected outcome of the SARS epidemic was that it accelerated the surge in car buying in China in 2003 as urban populations began to shun public transit. Car culture was definitely on the upswing in China at the time. But car sales in China rose by over 30 percent in 2003 compared to a year earlier, as anxiety about being in crowded places elevated. With over 46 million people in China under a temporary quarantine order due to the coronavirus, it is worth considering what unexpected consequences could result this time around. For example, telecommuting could become more accepted and widely practiced post-coronavirus, not because people remain afraid to go to work, but because working or holding meetings remotely could be found to offer productivity gains to businesses, especially where employees are in different locations or time zones.
Several Wall Street banks have lowered their oil price expectations for the first half of 2020 based on the coronavirus. Barclays is suggesting the effects could be transitory, with a loss in oil demand from China in the range of 600,000 to 800,000 b/d in the first quarter of 2020, resulting in about a $2 a barrel lower price expectation over the year. Citi’s projections are more dramatic, suggesting current freight and passenger traffic could be down substantially for several weeks, totaling a loss of about 1 million b/d of oil demand off China’s norm of 13.1 million b/d for oil use. Citi estimates freight is running 40 percent lower than usual, with consumer use even more substantially affected. As a result, Citi is lowering their oil price forecast for the first quarter of 2020 from $69 a barrel for benchmark Brent crude to $54 a barrel, warning that a dip to $40 could be possible, especially when combined with current warm winter temperatures. The fall in the volume of global tourism is also hitting jet fuel demand. Chinese tourists made over 150 million overseas trips in 2018, double the rate of the next largest nation of travelers, and were expected to account for a quarter of all tourism by 2030.
Beyond flagging oil use, China is currently turning away cargoes of liquefied natural gas (LNG). China’s temporary exit from the LNG market has worsened oversupply in the LNG market already hit hard by ample new production and weaker than usual winter demand. Asian LNG prices hit an all-time record low last week.
These projections raise the question of how transitory the weakness in China’s energy importing will be in the coming weeks and whether there will be any long run ramifications for energy use that are not yet anticipated. The U.S.-China trade deal had targeted $50 billion in energy purchases by China of U.S. oil, natural gas, and coal. That figure already looked like a stretch and could be even harder to reach now. Even before the coronavirus outbreak, falling global spot prices for LNG had prompted Chinese state firm Sinopec to delay signing a $16 billion multi-year supply arrangement with American firm Cheniere to purchase U.S. LNG. Trade volumes in global goods, in general, had already taken a hit in 2019 as companies looked to reorganize supply chains to reduce geopolitical risk. That trend is unlikely to be reversed this year, with ramifications for projections that global freight demand would support greater oil use and offset any losses in oil demand that could come from an upsurge in sales of electric automobiles and other inroads for energy efficient technology adoption.
For the time being, supply disruptions from Libya and a possible new round of cuts from the Organization of Petroleum Exporting Countries (OPEC) could bail out U.S. independent producers whose revenues, and to some extent, production rates are highly sensitive to oil price trends. But the boost expected to come to the U.S. energy sector from new trade deals could evaporate quickly if China is unable to get its economy back on its feet quickly as a result of the coronavirus outbreak.