John Bambridge, features and analysis editor at GlobalData, has 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.
Wood Mackenzie consultant Yujiao Lei has also provided insights on the impact of the Wuhan coronavirus on oil demand.
The ongoing coronavirus outbreak and subsequent large-scale quarantine measures are posing a major economic risk to China and beyond. With respect to the impact on oil demand, as preventive measures focus mainly on aviation and public passenger transport, jet fuel will be the most susceptible. The experience during the 2003 SARS outbreak suggests a severe and one-off impact to China’s demand for jet fuel and, to a lesser degree, gasoline and diesel.
Although the Chinese government has been taking action more swiftly in a more determined manner than in 2003, Chinese domestic and international transport activity is incomparably higher today and thus the impact may be larger. For Q1 2020, China’s oil demand could be reduced by over 250,000 bpd. Taking into account adjustments to other regions for separate reasons also, we have 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.
