Sunday, January 26, 2020

"Why The Coronavirus Is A Real Threat To Oil Markets"

Both Brent and WTI have gotten rocked since General  Soleimani was killed and World War III did not erupt:

And our usual knee-jerk reaction would be to wait for a counter-trend rally somewhere in this vicinity.
But not this time. More after the jumps.
From OilPrice, the headline story, January 23:
....Perception is Reality
With highly contagious and deadly viruses like the SARS CoV, fear rules the day. Whether it’s a personal fear that one might catch the virus, or whether one actually catches the virus, the result is that people will stop traveling to some extent.
Even the fear that people may stop traveling is enough to result in an economic slump. Whether one catches the virus or not is irrelevant economically speaking—the mere perception that it’s a possibility creates ripples in the world economy as people change traveling, purchasing, and trading patterns.

The Oil Market’s China Obsession
The oil markets are obsessed with China—specifically China’s demand for oil.
Oil demand was at the forefront of all the pricing moves throughout 2019. The thought of dampened demand from the world’s second largest oil consumer outweighs even significant geopolitical risk, as well as tangible oil production outages such as the attacks on Saudi Aramco oil facilities in September and Libya's current nearly complete outage of over 1 million barrels per day.  

One may look at China’s oil consumption, at 13.5 million bpd in 2018, as being far below that of the United States, which consumed 20.5 million bpd that same year. So, why all the China fuss? Surely U.S. demand would move markets more than China? But it’s the oil demand growth that moves prices, and China’s oil demand growth (and India’s too) is far greater than that of the United States. In fact, China’s oil demand has been growing at an annual rate of 5.5%, while the United States’ oil demand has been growing by 0.5%.
And most of what China uses, it imports, adding another layer of market-sway into the mix.
This is what moves markets.

Not even OPEC and its jawbone to herald its oil production-cut prowess can outshine negative news about what is already China's slowing demand growth.
And of all the threats to the oil industry that people were expecting in 2020, no one saw this coming: the virus ripping through China at unprecedented rates is eating into China's oil demand more than anyone could have ever expected.

Travel Disruptions
Every aspect of the economy hits the oil market. But of particular note is the effect the virus could have on travel, which would affect air travel and road travel, impacting jet fuel and gasoline consumption. And with the persistent robust supplies that are loitering on the market today, slack demand couldn’t come at a worse time.

All of this at a time when the oil market was hopeful of an increase in demand thanks to the Chinese New Year holiday that typically sees an uptick in travel and gift giving.
Against this perceived and real demand impact, OPEC will be mostly impotent, even with Libya’s million-barrel-a-day loss and Saudi Arabia’s overproduction.

History Repeats Itself—or Worse
SARS CoV could have the same effect on the oil market as the original SARS outbreak back in 2002, which saw the price of oil dip by 20%.
Goldman Sachs said that if it mimics the last virus-induced supply shock, the oil market could see a drop of 260,000 barrels per day in the global oil demand market—170,000 bpd of which would be in the form of jet fuel.

This loss, Goldman predicted earlier this week, could see oil prices fall by $2.90 per barrel, but oil prices have already fallen more than $4.50 per barrel over the last few days alone, with the Brent benchmark falling to $61.41 on Thursday from $65.95 on Monday. And this is despite major oil production outages in Libya....MORE
And on January 24th: "China Virus Fears Send Oil Prices Even Lower"

The problem with trading the chart is the lack of transparency on exactly what is going on in China.
I mean there is more than there was during the SARS and Bird Flu outbreaks, simply because of cell phones (but also because satellite coverage has gotten much cheaper) but we still don't have answers.
Charles Hugh Smith at his Of Two Minds blog has thought through some of the queries:

Some Practical Questions about the Coronavirus Epidemic
Restrictions that allow a significant number of people to move about, either with official approval or unsanctioned "black market" activity, cannot stop the spread of contagious diseases.

Like everyone else, I've been reading the mainstream media reports on the Coronavirus epidemic. I haven't found any information about the practicalities that immediately occur to me, such as:

1. When public transportation is halted and commerce grinds to a halt as people avoid public places and gatherings, thousands of employees no longer go to work. Who pays their wages while the city is locked down? The employers? Then who compensates the employers, since their income has also gone to zero?

Does China have a universal unemployment insurance system that can quickly issue payments to all people who are no longer going to work and getting a paycheck from an employer?
What about the thousands of migrant workers who don't have regular employers? Who pays them? If they're technically not officially sanctioned residents of the city, they don't exist in government records.

2. If people idled by the lockdown are supposed to live off savings, what about all the marginal workers with few resources? What are they going to live on once their meager savings are gone?

3. Given the choice of obeying the lockdown rules and starving or slipping out of the city to find paid work somewhere else, how many migrant workers will choose to slip away?

4. Unlike the developed West, many people in China still have ancestral villages to return to, rural towns where their grandparents or or other close relatives live. If work has dried up and you're fearful of catching a potentially lethal virus, wouldn't it make sense to slip out of the city and make your way back to the village where you can hunker down until the epidemic blows over?
Since people who caught the virus may not know they're a carrier, how will this migration not spread the disease to rural areas with few medical resources?

5. The typical city has about a week's supply of food, fuel, etc. at best. If the lockdown runs longer than a few days, scarcities of essentials will ignite hoarding, and remaining supplies will be snapped up. 
Since the city's residents need food, fuel, etc., it must be brought in regardless of the lockdown. This brings outside workers into the city and provides residents desperate to flee avenues to escape the lockdown. Every individual involved in this system is potentially exposed to the virus or is a potential asymptomatic carrier of the virus leaving the city. ...

So does China go into recession?
We may never know the answer if we depend on the Chinese authorities.
All eyes on Chinese oil imports (which of course can be gamed by curbing domestic production)
So who knows?