Lower China demand weighs on crude oil price

With over 50,000 flights cancelled and people just more fearful of travelling, the coronavirus has a short term impact on oil products like jet fuel


AVERAGE crude oil price will be lower than last year as the coronavirus outbreak and high production of non-OPEC members will dampen any substantial rise.

China, the world’s second-largest economy and epicentre of the outbreak, is set to experience a slowdown in economic activity, thus cutting and sapping energy demand, affecting subsectors such as aviation as thousands of inbound and outbound flights are cut off.

The OPEC and major partner, Russia, gave mixed signals about possible further output cuts to support prices in expectation of weaker global demand due to the coronavirus outbreak.

Asia School of Business assistant professor of management Dr Renato Lima de Oliveira said it has not been a great year for the oil and gas (O&G) sector so far.

“The price has gone down from almost US$70 (RM289.80) to the US$50 mark. But most likely, the US$70 is hard to sustain given the growth of production.

“On the basis of the total volume of production growth and global demand, it is unlikely from a market fundamental analysis that we can expect an average price for 2020 that is significantly higher than 2019,” he told The Malaysian Reserve yesterday.

De Oliveira added that the big issue for the energy market going forward is related to the fundamentals — the production from non-OPEC countries is increasing strongly and competition from alternative sources of energy is growing too.

Rystad Energy AS, based on a field-by-field analysis, predicts that non-OPEC oil supply in 2020 will grow by 2.26 million barrels per day, about double of the total market growth.

“On one hand, you have supply growing and in countries not subject to OPEC production cuts like the US, Brazil, Norway and Guyana. On the other hand, you have the demand growing more slowly and a perspective of peak consumption by the end of this decade,” he said.

De Oliveira noted that the coronavirus situation adds to the challenge — it is affecting heavily the country that has the biggest consumption growth.

In the last few years, the biggest increase in oil demand has come from China — in 2018, China consumed 13.5 million barrels of oil per day compared to less than eight million barrels per day a decade earlier, he said.

At the same time, China’s oil production has stayed flat, around 3.8 million barrels per day. During this period, about 50% of world oil consumption increase has come from China and it has been totally met by foreign sources.

With over 50,000 flights cancelled, and people just more fearful of travelling and doing business abroad, the coronavirus has a shortterm impact on oil products like jet fuel, de Oliveira said.

“The Chinese economy is already slowing down and that has been putting pressure on the predictions of oil demand. BP plc predicts the effects of the virus can cut oil market growth by up to 500,000 barrels per day or about 40% of the forecast number,” he said.

De Oliveira said by the dynamics of a virus infection, it is likely that in the second semester, with summer in the Northern hemisphere, the coronavirus propagation will be limited as high temperatures make it less likely for the virus to survive and contaminate more people.

“Make no mistake, the problems for the oil market are deeper. As the head of the International Energy Agency (IEA) said at the beginning of 2020, there is an abundance of oil in the market.

“This supply growth is unrelated to short-term price fluctuations, like the US attack to Iranian General Qasem Soleimani, disruptions in the supply from Libya, drone attacks to Saudi oil facilities, or the IPO of Saudi Arabian Oil Co.

“The current long-term prediction for oil prices is not of a rising price,” he said.

De Oliveira opined to sustain prices, OPEC would need to make bigger cuts, but this always comes with a huge cost — market share. “Cuts in production not followed by a proportional price increase means lower revenues. Under a scenario of growing production from non-OPEC countries, to cut production means increasing the revenues of your competitors.

“This is not sustainable, so it is unlikely that OPEC will be able to, alone, sustain high prices,” he said. De Oliveira added that the more OPEC cuts production to bump up prices, the more other producers increase their market share. This happened in the mid-1980s to the 1990s, when oil price stayed low for years. The difference is that now renewables are becoming increasingly competitive, cutting the perspective of demand growth for O&G in sectors like transportation.

“Besides, fossil fuels have fallen out of favour given the social pressures against climate change. Overall, for the oil industry, the coronavirus is the sickness of the day, but the issue it faces is more of a longterm ailment,” he said.