Impact of Wuhan coronavirus on oil demand

49381683546 223c74c9c3 cThe outbreak of coronavirus in China could reduce the region’s oil demand by more than 250,000 bpd, according to Wood Mackenzie consultant Yujiao Lei

Taking into account adjustments to other regions for separate reasons also, the consultancy has adjusted Q1 2020 world oil demand lower by 0.5mn bpd.

Wood Mackenzie expects oil demand to gain strength and start to recover after the first quarter, especially in the second half of 2020.

Wood Mackenzie has made the following predictions about the impacts of the coronavirus outbreak:

-The ongoing coronavirus outbreak will likely be a one-off event, with its effect on oil demand focusing mainly on jet demand principally in China and to a lesser degree in East/Southeast Asia. The impact on the other regions will likely be relatively modest.

-The impact on the use of petrochemical feedstock will likely depend mainly on the overall status of manufacturing as well as private consumption. Since China is a net importer of ethylene/propylene derivatives, if China’s domestic petrochemical demand slows, it will likely first lead to a reduction in imports of petrochemical goods, affecting the global operation of derivative exporters to China.

-China’s total in-land oil demand (excluding the marine sector) to grow by 150,000 b/d year on year in Q1 2020, a downward revision by over 250,000 b/d from our previous outlook in the early January 2020. For jet, gasoline and diesel/gasoil combined, in particular, demand is expected to fall by 100,000 b/d in Q1 2020. The low growth in total demand compares with annual average growth for China of over 300,000 b/d in 2019.

-Based on the assumption that the current outbreak will be largely contained within the coming few months, China’s total demand is expected to gain strength especially in the second half of the year, led mainly by petrochemical feedstock. For 2020 in total, our current forecast is for the coronavirus to lower our forecast for global oil demand by more than 100,000 b/d on an annual average basis to a projected gain of 1.2 million b/d for the year, but the risks are clearly on the downside.

John Bambridge, features and analysis editor at GlobalData, has also offered his view following the first confirmed case of Wuhan coronavirus in the UAE

He stated that the Gulf region, and Dubai in particular, is a major travel and business hub between Asia and Europe. Its links with China have been an important part of the region’s development in recent years.

“As headlines have laid bare the spread of the Wuhan coronavirus, global oil prices fell as low as US$58.35 a barrel in early trading on 27 January. This steep climb-down, from a high of US$68.9 a barrel on 6 January, demonstrates how demand-side considerations in Asia and particularly China – and the threat of a potential pandemic in the region – have risen to the fore,” he added.

He said coming amid the shutdown of Libyan oil production and a fresh missile attack on the US embassy in Baghdad, the coronavirus-linked drop in oil prices illustrates the now perennial underweighting of Middle East risk.

Repeated incidents over the past 12 months have caused only brief spikes in the oil price, with little lasting impact. Despite the geopolitical situation, prices have remained depressed on the back of underlying assumptions about supply and demand conditions. By historic standards, oil prices have stayed low amid the Middle East’s heightened tensions, which have brought the region the closest to open military conflict this side of a decade.

The market response to the health crisis in China is highly reactionary in nature, given that it is not yet clear how deadly the disease will be and what the long-term impacts on the Chinese economy and commodities could be.

“Beijing’s measures to curtail the spread of the virus will undoubtedly impact economic activity and growth in the short-term, but it is far more speculative to make assumptions about the longer-term impacts. What has been made overwhelmingly clear, however, is the degree to which oil prices are being driven by demand-side indicators, and the extent to which effects on the Chinese economy, in particular, are able to influence oil prices over and above destabilising events in the Middle East,” he noted.

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