Virus threat highlights OPEC reliance on Chinese oil demand

China’s oil demand may have fallen by up to a third following the coronavirus outbreak, trade analysts believe. (AFP)
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Updated 07 February 2020

Virus threat highlights OPEC reliance on Chinese oil demand

  • Emergency talks weigh up further supply cuts as coronavirus breakout hits output in world’s second-largest market

BEIJING: Fears of an economic slowdown, fueled by the coronavirus slashing output in China, has shone a spotlight on OPEC, whose oil is heavily bought by the world’s second-biggest economy.

“China has become increasingly important for OPEC countries in recent years,” research group JBC Energy said.

In total, more than two-thirds of China’s crude imports comes from the Organization of Petroleum Exporting Countries and Russia.

Following a slump in prices, OPEC and its key oil-producing ally Russia have been meeting this week to discuss the situation.

In an apparent sign of the difficulties involved, OPEC delegates meeting in Vienna announced that the talks would continue on Thursday.

However, it is not a formal meeting on output, as was the case in December when OPEC and its OPEC+ allies extended an existing agreement to curb crude production to prop up prices.

Saudi Arabia and Russia are the biggest foreign suppliers of crude to China.

But as a whole, OPEC would be seriously affected by a slump in Chinese oil demand.

Oil prices have fallen heavily overall during the past couple of weeks on fears of a China-fueled global economic slowdown.

The price falls have raised eyebrows at OPEC, whose 13 member nations pump out around one-third of global crude and are anxious to safeguard revenues, faced with weaker Chinese demand.

“China is the world’s second- largest oil-consuming country, contributing 13 percent of global oil demand,” said Yujiao Lei, analyst at commodities research group Wood Mackenzie.

“As a fast-growing economy, more than one-third of global oil demand growth comes from China.

“Without sufficient domestic supply, China’s oil dependency keeps rising, which makes it one of the most important markets for OPEC,” Lei added.

Saudi Arabia said this week that the impact of the virus on oil demand was “extremely limited” and “driven by psychological factors.”

Nevertheless, and according to JBC Energy, “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” in the absence of a major development on containing the virus.

Awaiting a possible reduction in OPEC production, Bloomberg has reported an increased interest in demand for oil tankers to store crude caused by a drop in refinery activity.

Oil prices are down around 15 percent since the start of the year after benchmark contracts Brent North Sea and WTI dropped under $55 and $50, respectively, for a barrel this week — the lowest levels in 13 months.

“Oil prices have been under tremendous selling pressure since the breakout of coronavirus as investors are concerned about oil demand,” Avatrade analyst Naeem Aslam said on Wednesday.

“It is widely anticipated that the Chinese oil import, which was sitting at nearly 11 mbpd (million barrels per day) at the start of this month, is going to see significant weakness.

“We believe that this number has dropped to 7 mbpd.”

Saudi minister: OPEC+ will take responsible approach to virus

Updated 26 February 2020

Saudi minister: OPEC+ will take responsible approach to virus

  • Saudi Arabia supports the further oil production cut, but Russia is yet to announce its final position on the matter

RIYADH: Saudi Arabia’s energy minister said on Tuesday he was confident that OPEC and its partner oil-producing nations, the so-called OPEC+ group, would respond responsibly to the spread of the coronavirus.

He also said Saudi Arabia and Russia would continue to engage regarding oil policy.

“Everything serious requires being attended to,” the minister, Prince Abdul Aziz bin Salman, told reporters at an industry conference in Riyadh.

An OPEC+ committee this month recommended the group deepen its output cuts by an additional 600,000 barrels per day.

Saudi Arabia supports the further oil production cut, but Russia is yet to announce its final position on the matter.

The minister said he was still talking with Moscow and that he was confident of Riyadh’s partnership with the rest of the OPEC+ group.

“We did not run out of ideas, we have not closed our phones. There is always a good way of communicating through conference calls,” he said.

Regarding the coronavirus, which has impacted OPEC member Iran, he said OPEC+ members should not be complacent about the virus but added he was confident every OPEC+ member was a responsible and responsive producer.

The flu-like SARS-CoV-2 virus, which first broke out in China, has now spread to more than 20 countries.

“Of course there is an impact and we are assessing, but we’ll do whatever we can in our next meeting and we’ll address that issue,” UAE Energy Minister Suhail Al-Mazrouei said at the same industry conference.

Saudi Aramco CEO Amin Nasser on Monday said he expected a short-lived impact on oil demand.

“We think this is short term and I am confident that in the second half of the year there is going to be an improvement on the demand side, especially from China,” he said.

Oil climbed on Tuesday as investors sought bargains after crude benchmarks slumped almost 4 percent in the previous session, although concerns about the global spread of the virus capped gains.