China virus threatens to further dampen Gulf economies

Coronavirus cases have been reported across the Asia Pacific region and in North America and Europe, but a Wuhan family in the UAE are the first in the Middle East. (AFP)
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Updated 13 February 2020

China virus threatens to further dampen Gulf economies

  • Over 1.6 million Chinese tourists visited the Gulf states in 2018

DUBAI: The coronavirus crisis, which has already battered oil prices, could further undercut Gulf economies.

The six Gulf states — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE — count China as their main trading partner and crude buyer, which soaks up about a fifth of their oil.

But China’s energy demand has sagged as authorities lock down millions of people in several cities to prevent the spread of the disease, now named COVID-19, that has killed more than 1,100 people so far.

The knock-on effects for a global economy that is dependent on a buoyant China — the powerhouse which accounts for one third of the growth in oil demand — have seen prices sink to a one-year low.

Analysts believe the crisis, which the World Health Organization said this week spells a “very grave” global threat, will undercut the industry and dampen prices.

“There is no question that the virus is having a significant impact on Chinese oil demand,” Bill Farren-Price of Petroleum Policy Intelligence (PPI) told AFP.

If the lockdowns continue into the year’s second quarter,” he said, “then it starts to look more serious and will have deeper impacts on the real economy.”

Non-oil trade between Beijing and the Gulf Cooperation Council (GCC) has grown from just several billion dollars two decades ago to nearly $200 billion last year.

One industry that has taken an early hit is tourism.

Over 1.6 million Chinese tourists visited the Gulf states in 2018, most of them heading to Dubai, and the number had been rising fast.

In recent weeks, however, Chinese visitors have been rarely sighted even in Dubai as airlines have suspend routes following the outbreak, threatening the ambitious tourism targets.

The latest shock comes shortly after the International Monetary Fund warned that Gulf states must undertake much deeper reforms or risk seeing some $2.5 trillion in accumulated wealth drain away in 15 years as global demand for oil slides.

Oil income is highly sensitive to Gulf states as it contributes more than 70 percent of public revenues.

Since Jan. 30, a month after the disease was discovered, oil prices have dropped by around 20 percent, slashing tens of billions of dollars from GCC revenues.

An oil price crash in mid-2014 had already seen public revenues dwindle and growth rates tumble, forcing borrowing and a drawdown on assets to plug budget deficits.

Major energy-producing countries, which had already cut production in an effort to revive the market, now face a “double whammy” of slumping prices as well as more fundamental economic trauma, said Ellen Wald, author of the book “Saudi Inc.”

“The declines, coming at a time of curtailed output, threaten economic shocks that, if long-lasting, could lead to the kind of political and regional instability that was avoided during the last steep drop,” she said in a Bloomberg news agency commentary.

London-based research consultancy Capital Economics also warned that a prolonged impact from COVID-19 could trigger a major economic downturn.

“Fears about the coronavirus outbreak have weighed on oil prices and clouded the near-term outlook for the Gulf countries,” it said in a report.

“Lower oil prices and a possible deepening of oil production cuts will act as a headwind to growth in early 2020.”

As a result of the sharp decline in oil prices, a technical committee for OPEC and its partners last week recommended additional production cuts of 600,000 bpd to add it to the 1.7 million bpd of cuts already in place.

Russia has been reluctant to commit, promising a decision soon.

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.