Oil vs Coronavirus : A Negative Correlation That Impacts The Global Economy.

By Mahaman Laouan Gaya,
Oil Expert,
Former Secretary General of African Petroleum Producers Organization (APPO)

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For a few weeks, the world has been helplessly witnessing an upheaval in the oil market whose reason, unlike those traditionally known, is completely unexpected and unprecedented. Indeed, since December 2019, and more markedly at the start of this year, a more unprecedented than unexpected phenomenon is upsetting all the forecasts for the international oil market for the year 2020. At a time when trade tensions are somewhat subsiding between China and the United States of America, and a new crisis is emerging between President Donald Trump and Iran, there is a somewhat unknown epidemic appearing at a devastating pace, and with a rate of contamination and death which is increasing daily. The 2019-2020 coronavirus epidemic, also known as “Wuhan pneumonia”, “appeared” in December 2019 in the city of Wuhan in central China. It is caused by a virus of the coronavirus family, baptized nCoV-2019 (nothing but the acronym seems formidable) and renamed Covid-19 by the World Health Organization (WHO) last February 11th, 2020. Already exported (to date) to nearly thirty countries in the world, the coronavirus now constitutes an international threat and in view of its very rapid spread, we are already wondering about its impact on the global economy. Many investors and analysts have quickly made comparisons with the epidemics and pandemics that the world has known since the beginning of this 21st century. Comparison not being right, it should however be recalled that the last major epidemics and pandemics have resulted in economic losses estimated at several billion dollars in the world. In a report published in 2018, the Global Preparedness Monitoring Board (GPMB), a joint entity of the WHO and the World Bank, announced that between 2002 and 2003, the epidemic of SARS (severe acute respiratory symptom) – which had recorded 8,096 patients, including 774 deaths, in 26 countries around the world, resulted in productivity losses of 39.3 billion dollars (14,345.00 billion Naira). Also, in 2009-2010, the H1N1 flu pandemic had affected almost the entire planet and caused the death of nearly 18,500 people. According to the GPMB, the financial impact is between 44.75 and 54.60 billion dollars (16,335.00 to 19,925.00 billion Naira). “Recently”, between 2014 and 2016, with the Ebola virus in Guinea, Liberia and Sierra Leone, more than 28,000 people were infected, including more than 11,000 deaths; which estimated the economic and social impact at around 52.3 billion dollars (19,115.00 billion Naira). The GPMB notes that trade and tourism, which accounts for about 18% of the global economy, are most affected by epidemics and pandemics. Wuhan’s coronavirus, to date (February 18th, 2020) with over 72,000 infections and over 1,800 deaths, will most certainly have “its” far greater economic consequences. Beyond strictly medical concerns, the coronavirus raises concerns about the potential economic cost of a global epidemic. Already, the major financial centres of the world have recorded declines in recent days due to the very rapid evolution of this economically “crippling” epidemic. If it is still too early to formulate precise answers on the economic, financial and social impacts, there is at least one sector which is already feeling the terrible consequences ; its petroleum sector. The logic is simple. China is the world’s largest importer and second consumer of crude oil after the United States of America, and growth in Chinese demand alone has driven the crude oil market for years. If it falters, the whole world oil structure is shaking. The country therefore needs ever more hydrocarbons to fuel its economic growth, while it produces less and less. The Wuhan virus, which will certainly reduce oil consumption in China in the short term, has already had a significant downward impact on oil prices : indeed, since the start of the epidemic, crude oil prices have dropped in one week from US$ 62 per barrel to US$ 57, before climbing to US$ 59 on Friday morning January 31st, 2020. Over the period from January 15th to 22nd, 2020, Chinese oil imports plunged by almost 2 million barrels per day compared to the average in January 2019, and by 3 million barrels per day compared to the start of 2020 year. Indeed, since the outbreak of the epidemic, Chinese crude imports have been in free fall. They would have dropped from 11 million barrels a day to 8 million by the end of January and could drop further if the epidemic continues. As of January 20th, 2020, the price of oil dropped sharply from US$ 65 to US$ 59 per barrel, or almost 10% in just 8 days. This drastic drop in Chinese consumption led to a drop in the price of a barrel of WTI (the American benchmark), falling below the threshold of US$ 50 today, while Brent, the European benchmark, is trading below 55 US$.
Crude oil is on the verge of entering a fundamental downward trend, in a context where there is more and more fear that the coronavirus ”crushes” the Chinese economy more, already lethargic, and won’t spread to the rest of the world.
In fact, the more the epidemic spreads, the greater the potential economic impact and the impact on oil consumption. The “recession” in the petroleum sector would be seen in the event of entry into a bear market defined by a price drop of at least 20% from a recent peak. The two world reference barrels, the WTI listed on NYMEX in New-York and Brent listed on the Intercontinental Exchange (ICE) in London, have suffered a decline of 16% and 12% respectively since the beginning of the year. Very dependent on China for their exports, African economies are the first victims by contagion of the epidemic. The oil producing countries will be the first to be affected as China consumes more than 10% of world production and contributes more than a third to the increase in demand for oil. In just the month of January 2020, the Coronavirus defeated what the Organization of the Petroleum Exporting Countries (OPEC) had taken more than a year to build. Producing countries reunited within OPEC+ (the 13 OPEC members led by Saudi Arabia and the 10 other large producers led by Russia) did their utmost to obtain respect for the reductions promised during of the last 18 months. They have so far remained stagnant in their position, despite the many and derogatory tweets from the President aimed at disrupting the rise in the price of fuel at the pump in the United States, which, according to Donald Trump, could cost the Republicans dearly. of the next mid-year elections. However, with all the sacrifices of production reduction provided by OPEC+ over the past year and a half, no one could have envisaged the current crisis. The Coronavirus has sapped practically all the confidence of the oil markets and has left nothing but fear in its place. Today, all that traders and other players in the oil markets think about, what levels will the price per barrel go down, because the “Covid-19” continues “inexorably” its little snowman. Correlation is not causation, of course, but the slowdown in Chinese demand is real. A whole province, that of Hubei (60 million people) is placed in quarantine and the whole country under strict observation. The travel industry is the first to feel the impact of this outbreak. The foreclosure of Hubei province prevents business trips as well as the movement of goods and workers. While the Coronavirus cannot bring the Chinese economy to its knees, its impact on the transportation sector is very noticeable. Obviously, there is no growth without the transportation of people and goods. Today, the access roads are closed, and in the streets usually crowded, cars no longer circulate (The city of Wuhan is a major center of automobile production, with 1.7 million vehicles in 2018), the slowdown or the systematic cessation of maritime transport in China will block millions of containers, rail transport at half mast throughout the country and national and international air traffic slowed down, even stopped in Wuhan (reduction in the demand for kerosene for aircraft). Air activity at the five airports closest to Wuhan has dropped by almost 50%, while air traffic in Shanghai and Shenzhen has dropped considerably.but oil is the ultra-dominant source of energy for the transport sector. Experts anticipate that Chinese demand for oil could drop by 300,000 to 400,000 barrels a day, or even more in the first quarter. Taking into account the other countries, world demand over the same period could be seriously reduced (some analysts have gone so far as to mention the bar of 3 million barrels per day !). To this dark picture of the transport sector, Coronavirus has put other sectors of chinese economic activity at half mast. Cinemas in big cities closed automatically, half-empty hotels and restaurants forced to stay closed for lack of customers; the tourism and leisure industry which must adapt to an extraordinary situation. Second economy on the planet, when China sneezes, the whole world catches the flu. But, it’s not just oil, all the raw materials, of which China is the world’s leading importer, have seen their prices fall: copper, iron, palm oil, rubber, etc. The impact of the coronavirus is so tangible that OPEC plans to advance its next meeting to February, initially scheduled for March, to try to adjust their production as quickly and as quickly as possible in order to support black gold prices. and guarantee the balance of the oil market. Oil being the first source of energy consumed in the world; that’s more than 35% of the world’s energy consumption. No modern economy can do without it. We are certainly in a period of energy transition, but renewable energies excluding hydroelectricity still only represent 4% of the world’s energy. So there are close links between the global economy, its growth and the oil market. And there is also, in the other direction, between the evolution of the oil price and the oil market, tensions on these markets, the world economy and geopolitics. Its a two-way relationship. By paralyzing the world’s largest importer and second consumer of oil, this virus attacks the heart of the global economy; China accounts for more than 16% of the world economy. With China stopped, economic activities around the world are directly and indirectly affected. As if the ‘Covid-19’ hit globalizationat its heart.

By Mahaman Laouan Gaya

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