Chinese oil demand has fallen by 3m bpd or around 20% as a result of the restrictions imposed by China to contain the spread of the coronavirus

by SHAZNI ONG/ pic credit: www.dialogasia.com

BURSA Malaysia Energy Index, which tracks oil and gas (O&G)-related stocks on the local exchange and is highly correlated to energy prices, is downtrending as oil prices trade between US$50 and US$55 (RM226.05) a barrel levels on expectations of lower global oil demand due to the coronavirus (nCoV) outbreak in China.

The index closed slightly lower, down 0.07% to 1,146.40 points. In the past five days, the index has been down 5.72% and 9.31% lower in the past 30 days.

The index also saw eight shares fall and 12 rise with Sapura Energy Bhd contributing the most to the index decline, falling 4.08% or one sen lower to 23.5 sen at close yesterday.

The price is a historic low for the counter following changes made at its board level recently.

Dialog Group Bhd advanced 1.85% or six sen higher to RM3.31, while Carimin Petroleum Bhd rose 11.5% or 11 sen to RM1.07 at close of trading yesterday.

Bursa Malaysia Energy’s members had a total market capitalisation of RM53.6 billion as of yesterday.

The performance was quite the contrary to about a month ago on Jan 6, where the index reached its alltime high since its inception in 2018.

The sector fundamentals remain bearish. Chinese oil demand has fallen by three million barrels a day (bpd) or around 20% as a result of the restrictions imposed by China to contain the spread of the coronavirus.

AxiCorp Financial Services Pte Ltd chief market strategist Stephen Innes said Chinese oil and product inventories are growing, and reports suggest Chinese refineries will accelerate this trend by cutting refinery runs a further 10%13% from current levels.

“We are in the middle of the worst oil demand shock since the 2008/09 financial crisis, and with uncertainty on the duration of the coronavirus effect, it seems unlikely oil or oil equities will recover until there is evidence that demand has stabilised and is beginning to recover,” he told The Malaysian Reserve in an email reply on Monday.

Innes opined that additional OPEC+ cuts are necessary to put a floor on oil prices, and may even prompt a bit of a rebound.

“But I cannot see investors turning bullish on oil or oil equities until the virus is completely in the rear-view mirror and it is possible to quantify its economic impact.

“The situation is now so dire that the proposed emergency OPEC+ meeting discussed for early February reportedly even has Russian support now,” he added.

In a morning note earlier, Innes said the most damaging immediate effects are felt from the number of airlines cancelling flights into China that are toppling like dominos, as this is lost demand the oil producers cannot make up.

“Indeed, the oil market has caught more than a case of the sniffles. China’s larger oil market footprint (5.7 million bpd in 2003 versus 13.9 million bpd yesterday) raises the potential for enormous demand devastation given China’s current oil demand profile in comparison to the SARS epidemic era,” he said.

Innes added that oil bulls are hoping for an earlier OPEC meeting (February instead of March 5) which translates into greater supply discipline.

“But this is by no means certain given OPEC’s current low level of output and the consensus among OPEC ministers who believe the market impact will be smaller than the current level of market fear priced into the equation.

“Regardless of the outcome of the 2019-nCoV epidemic, oil prices may have further to fall and will generally remain under downside pressure due to the toxic combination of the current level of extreme demand destruction and excess non- OPEC supply,” he said.