Oil Price May Rise a Record High in the Aftermath Of Coronavirus

By Ikenna Omeje

The outbreak of COVID-19 (coronavirus) in the Chinese city of Wuhan in December 2019, which so far has spread to over 170 countries around the world, with China, Italy, Spain, Iran, France and U.S as worst hit countries, has left the global economy shrinking; with the crude oil industry at the receiving end. The Price of crude has been on a pendulum, swinging between $25 and $29 per barrel in recent weeks. As of March 26, 2020, there were over 487,000 cases, over 22,000 deaths while over 117,000 infected persons have recovered from the virus.

In its monthly report for February, the Organisation of  Petroleum Exporting Countries (OPEC), said that the Global oil demand will all but stall this year as the virus outbreak is expected to hit economies in various regions.

The Organization stated that demand will only increase by 60,000 barrels per day (bpd) to an average of 99.7 million bpd, down from the OPEC previous growth forecast of 480,000 bpd.

The  organization and its allies failed to reach a deal on production cuts early in March, after Russia– the World’s second largest oil producer– refused to limit supply to counter the effects of the outbreak, plunging oil prices below market expectation.

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OPEC, which is led by Saudi Arabia, had agreed early in March to recommend a further adjustment of 1.5 million barrels per day until 30 June 2020. The plan was for the 10 OPEC ally countries to  cut supply by  500,000 barrels, with the 14 OPEC members themselves absorbing the rest of the cuts.

Speaking  at a consultative roundtable meeting organised by the Central Bank of Nigeria (CBN) in Abuja recently, themed “Going for Growth 2.0”, the Group Managing Director (GMD) of the Nigerian National Petroleum Corporation (NNPC),   Mele Kyari  urged Nigerians to prepare for more tough time in few months following the crash in the prices of crude oil due to outbreak of coronavirus.

But if precedent is anything to go by, the price of crude may experience geometric rise in the aftermath of the virus. According to an Adjunct Senior Research Scholar and former Chief Oil Analyst at the International Energy Agency, Antoine Halff in his article, “When China sneezes: OPEC’s struggle to counter the oil demand impact of coronavirus”, he stated that “Shortly after the SARS outbreak, Chinese demand recovered with a vengeance in the second half of 2003 from its dip earlier in the year. A shortfall in Chinese power generation capacity emerged in the summer of 2003, pushing diesel demand for backup generators through the roof and launching Chinese oil demand on an ascent that would eventually send oil prices to record highs in July 2008. The global integration of the Chinese economy since 2003 and the lags in the diffusion of the effects of the Coronavirus make such a V shape recovery much less likely this time around. Even in the event of a recovery in Chinese and global oil demand, it will take a long time to draw down the crude stock overhang accumulated in recent weeks.”

He argued that,” In the last 20 years, emerging markets, and China in particular, have been the engine of oil demand growth and the main support of oil prices. The takeoff in Chinese and emerging-market consumption that fueled the 2003-08 oil price rally sparked fears of oil scarcity and inspired a whole library of books on the seemingly inevitable “resource wars” between oil-thirsty emerging countries and industrialized consumers over finite oil reserves. The US shale revolution has since put these supply worries to rest, sparking the fastest production growth in oil history and replacing worries over “peak oil supply” with a feeling of endless abundance. With the coronavirus outbreak, the tide has turned. China’s impact on oil prices no longer seems one-directional.”

Halff added that,” China’s economy has grown beyond recognition since 2003, both in absolute numbers and relative to other economies. Its oil consumption has more than doubled from an estimated 5.8 million barrels per day (bpd) to 13.7 million bpd last year, second only to that of the United States. China accounted for 14 percent of global demand in 2019, up from 7 percent in 2003. Its share of oil imports grew even faster, tripling from 5.5 percent to 15.5 percent by 2018.” Even though, Halff later averred that  SARS epidemic of 2003 shouldn’t be  a guide, high demand of oil in China and other countries in the aftermath of coronavirus,  is a possibility.

# Chinese impact on crude oil demand

The exponential growth of the Chinese economy in the last 20 years, has made it the propeller of global oil demand growth. China is now the world’s largest oil importer and a world storage capacity holder.

The impact of coronavirus  on global crude oil balances did not happen until early in February, because Chinese refineries, steel mills industries and power plants were not shutdown, including in the epicenter of the virus, Wuhan.

Halff captures  it this way: “China refineries kept humming—along with other strategic industries such as steel mills and power plant—including in and around Wuhan, the epicenter of the epidemic, even as activity in more labor-intensive sectors such as car manufacturing and services ground to a halt. While air, rail, and road traffic were sharply curtailed and caused end-user oil-product demand to plummet, crude oil demand from Chinese refineries did not immediately follow suit. China’s crude demand and its pull on international supplies took a hit, but not nearly as much as domestic product demand, and the decline was offset by the loss of Libyan supply due to domestic strife at about the same time.”

The dip in crude oil price shows  China’s significant  in the global oil demand. Some analysts are of the view that OPEC market strategy of supply cuts may not be a long term solution.

James Williams of WTRG Economics believes that, “Recession risk is high. If you look at history, recessions cause low oil prices.” He estimates that global oil consumption will fall by nearly four million barrels in the first quarter of this year.

‘Unless the Chinese economy recovers very rapidly, it’s going to cascade throughout the world, particularly in Europe and the US,’ Williams told AFP.

#Impacts of Chana’s low demand on oil producing countries’ economy

The International Monitary Fund (IMF) had in October 2019 predicted a slow economic growth of 2.5 percent for 21 African countries. These countries– IMF defines as resource-intensive countries. This slow growth has further been worsen by the impact of coronavirus. According to Financial Times, ” A slowing Chinese economy had already hit trade between Africa and China, which grew 2.2 per cent last year to $208.7bn, compared with a 20 per cent rise a year earlier.”

To reflect the effect of coronavirus on international oil prices, IMF slashed its forecast for Nigerian Gross Domestic Product growth this year from 2.5 per cent to 2 per cent.

Quoting MIT’s Observatory of Economic Complexity, Financial Times said,”Other countries on the continent could be hit far harder. While China takes just over 1 per cent of Nigeria’s oil, Chinese buyers accounted for 95 per cent of South Sudan’s exports and 61 per cent of Angola’s in 2017, in the form of crude oil, according to data from MIT’s Observatory of Economic Complexity. China took 58 per cent of Eritrea’s, mostly in zinc and copper ore. For the Democratic Republic of Congo, the figure was 45 per cent, mostly in the form of cobalt shipments.

“Angola, which is the continent’s second-biggest oil producer after Nigeria and has deep ties to the Chinese market, has reportedly already diverted some cargoes destined for the country because of lack of demand.

“Exports to China account for 23 per cent of Angola’s GDP, according to data compiled by Renaissance Capital. A prolonged fall in oil markets would threaten one of Africa’s biggest IMF programmes there, as the government of President João Lourenço has counted on prices staying at an average of $55 a barrel to help stabilise public finances.”

Mauricio  Cardenas, a Visiting Senior Research Scholar at the Columbia Center on Global Energy Policy  in his article article titled,”The Impact of Covid-19 and the Oil Price War on Latin America”Said, “The main implications of low oil prices for Latin America are fiscal. Each US$10 decline in the price represents a loss of fiscal revenues close to 1 percent of GDP in Ecuador and Venezuela, two countries heavily fiscally dependent on oil. Brazil, Colombia, and Mexico lose half of that, which is still a significant number. To complicate matters even more, before the decline in oil prices of March 9, 2020, there was already a large difference between the oil price used by some countries in their fiscal accounts and the actual market price. For Mexico and Colombia, that difference has now reached $30 per barrel.”

He added,” In Brazil, Latin America’s largest economy, the effects of the twin shocks are already apparent. The growth outlook for 2020 will be revised downward, from 2.2% to a likely 1.5%. Given relative low inflation, Brazil’s central bank will try to offset lower growth figures with interest rates cuts, which have already been announced.”

# IEA’s March forcast on oil demand

In the lastest oil market forcast by International Energy Agency (IEA), global oil demand is expected to decline this year as the impact of the new coronavirus  continues to weigh down on the global economy, as a result of constricting travel and broader economic activity.

“The coronavirus crisis is affecting a wide range of energy markets – including coal, gas and renewables – but its impact on oil markets is particularly severe because it is stopping people and goods from moving around, dealing a heavy blow to demand for transport fuels,” said Dr Fatih Birol, the IEA’s Executive Director. “This is especially true in China, the largest energy consumer in the world, which accounted for more than 80% of global oil demand growth last year. While the repercussions of the virus are spreading to other parts of the world, what happens in China will have major implications for global energy and oil markets.”

The IEA predicts in this latest forcast that global oil demand will stand at 99.9 million barrels a day in 2020, a demand cut of around 90,000 barrels a day from 2019, which  is a sharp drop from the IEA’s forecast in February, which predicted that global oil demand would grow by 825,000 barrels a day in 2020.

Speaking on the impact of low oil demand on countries that depend heavily on revenue from oil, the IEA boss said, “We are following the situation extremely closely and will provide regular updates to our forecasts as the picture becomes clearer.”

“The impact of the coronavirus on oil markets may be temporary. But the longer-term challenges facing the world’s suppliers are not going to go away, especially those heavily dependent on oil and gas revenues. As the IEA has repeatedly said, these producer countries need more dynamic and diversified economies in order to navigate the multiple uncertainties that we see today.”

# Expected rise in demand

It’s expected that the prices of oil will rise in the aftermath of the virus, as China, which its economy has been on a lockdown for more than two months will do everything possible to revive her economy. The return of economic activities in the world’s largest importer of oil will play a key role in demand increase for oil.

Another factor, which is expected to increase the prices of oil in the international market is India’s  ambitious agenda to expand energy access to all its people, reduce air pollution, increase energy security, and reduce carbon emissions intensity. So far, the country has made tremendous progress providing access to electricity and clean cooking to its people. India has rapidly increased the deployment of renewables even as coal still supplies two thirds of its electricity mix.

According to Columbia  Center on Global Energy Policy, “The country’s oil consumption is expected to grow faster than any other major economy, as are its CO2 emissions. In short, with a population of 1.4 billion people, and rapidly rising energy demand, India will be a key country, perhaps the key country, for energy markets and climate change in the decades to come.”

Also, a look at the IEA March report gives a glimmer of hope for a possible rise in prices of crude oil.The IEA  medium-term outlook examining the key issues in global demand, supply, refining and trade to 2025 states that, “Following a contraction in 2020 and an expected sharp rebound in 2021, yearly growth in global oil demand is set to slow as consumption of transport fuels grows more slowly, according to the report. Between 2019 and 2025, global oil demand is expected to grow at an average annual rate of just below 1 million barrels a day. Over the period as whole, demand rises by a total of 5.7 million barrels a day, with China and India accounting for about half of the growth.

“At the same time, the world’s oil production capacity is expected to rise by 5.9 million barrels a day, with more than three-quarters of it coming from non-OPEC producers, the report forecasts. But production growth in the United States and other non-OPEC countries is set to lose momentum after 2022, allowing OPEC producers from the Middle East to turn the taps back up to help keep the global oil market in balance.”

The former  Secretary-General of OPEC, Alvaro Silva-Calderón, said in the 2003 annual report of the organization that,” Despite signs of renewed global economic strength throughout 2003, geopolitical uncertainties and the impact of the outbreak of SARS in Asia kept energy markets unsettled throughout the year. The annual average price of the OPEC Reference Basket rose by $3.74 per barrel on a year�on-year basis, to average $28.10/b. The Basket ended the year at $29.44/b (a rise of 15.4 per cent), with most of the gains occurring in the first and last quarters of the year. Bullish sentiment prevailed throughout 2003, as concerns over possible supply interruptions from some OPEC Member Countries, coupled with the threat of a US-led invasion of Iraq in the early part of the year, kept prices strong in a backwardated market.”

# Analysts perspectives on possible rise in prices of crude oil 

Speaking on possible rise in prices of crude oil, the Founder and CEO of energy markets consultancy Vanda Insights, Vandana Hari told CNBC that there is no upside catalysts for oil.

She called the fall in oil prices “premature” and “overdone,” and further stated that even before the outbreak of the new Coronavirus, there were “bearish leanings” in the market. That includes the de-escalation of U.S.-Iran hostilities and a mild winter.

“Perhaps a bigger one is that the China-U.S. trade deal … has not really raised hopes for commodities seeing a major comeback in demand,” she added. “All of these factors will remain and I presume they have contributed to this fear and panic being a little bit more amplified.”

She said that OPEC and its allies could “put a floor” under prices.”I do believe they will do everything in their power, but with a caveat again, that we’ll have to see … the downslide that we’ve seen in prices over the past week become quite entrenched.”

“It’s well known that $60 for Brent is a kind of psychological floor that they would like to defend,” she added. “I do believe they will step in, but I think it’s again quite premature for them … to pronounce that they will.”

“It is based on a lot of fear and panic.” Hari continued, “That fear and panic will probably not die down anytime soon.”

“It’s natural, very human to … hark back to SARS,” she said. “However, when it comes to the oil market, I don’t think it’s entirely comparable.”

Julian Lee in an article titled,”A $30 oil is the real virus threat to OPEC” published by Bloomberg, said, “Any hopes that demand will rebound last this year in a robust enough way to offset the first-half slump are built on shaky foundations. The flights that have been cancelled are gone, not postponed. The road trips not made this week won’t be made up in future weeks. Traffic may return to normal levels once the virus is brought under control, but there won’t be a surge beyond that from pent-up demand.”

Despite the scepticism of a possible rise in the prices of crude oil, it’s not unlikely that there will be price surge in the aftermath of the novel coronavirus. In the coming weeks, economic activities are expected to pick up in China following the relax in the restriction of movement. To ensure speedy economic recovery, China is likely going to embark on massive economic policies, which will be aimed at stimulating its economy. And crude oil as a driver of Chinese industries will be in high demand in the country.

Apart from the expected surge in demand in China, there would also be massive movement of people around the world who have been indoors following lockdown in most countries. This  would lead to possible high demand of crude products in various countries.

But these can only happen if OPEC+ end the ongoing price war, which has pushed prices below $30 per barrel. With a new supply cut agreement by OPEC members and their allies, it’s possible to have price  surge in the coming months in the aftermath of coronavirus pandemic, which has left global economy haemorrhaging.