Tumbling Oil Demand Hikes OPEC Fears Amid Coronavirus Outbreak
Hiking fears of a global economic slowdown due to coronavirus outbreak have become a matter of serious concern for the Organization of Petroleum Exporting Countries and Russia (OPEC). As said by research group, JBC Energy, “China has become increasingly important for OPEC countries in recent years.”
Drooping oil demand and a consequent slump in oil prices is affecting OPEC’s crude exports to China. For discussing the seriousness of the situation, OPEC and its key oil-producing ally Russia have been holding meetings this week. Sources claim the OPEC meeting scheduled for today is not a formal meeting on output.
The biggest foreign suppliers of crude to China are Saudi Arabia and Russia. Even though oil prices bounced back yesterday, there has been a significant fallout in the past couple of weeks. As an analyst at commodities research group Wood Mackenzie, Yujiao Lei said, “OPEC would be seriously affected by a slump in Chinese oil demand. As a fast growing economy, more than one third of global oil demand growth comes from China.”
He added, “Without sufficient domestic supply, China’s oil dependency keeps rising, which makes China one of the most important markets for OPEC.”
According to Saudi Arabia, currently the impact of coronavirus on oil demand is “extremely limited” and “driven by psychological factors”. JBC Energy claims, “OPEC/OPEC+ only really have one option, and that is to announce further supply cuts, otherwise the … price (of oil) is likely to fall further.
Pertaining to a plunge in refinery activity, Bloomberg has estimated that oil demand will hike for oil tankers to store crude. Avatrade analyst Naeem Aslam claims, “oil prices have been under tremendous selling pressure since the breakout of coronavirus as investors are concerned about oil demand”.
Restricted air and road travel, quarantined cities and extended factory closures post the lunar new year holiday have also led to collapsing demand. Currently, OPEC countries and allies including Russia are working to avoid a consumption fallout similar to the global financial crisis in 2008.
As per John Kilduff, “The market will promptly punish OPEC+ for its inaction.”
In case Chinese government isn’t able to control further spread of coronavirus and extends the travel ban, oil demand is sure to witness a major fallout. In such a situation, it remains to be seen what steps OPEC will take to overcome the situation.
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