Americans may have seen a hit to their retirement portfolios over the past two weeks, but they are also suddenly paying less at the pump. The underlying reason is the same: an outbreak of a previously unknown coronavirus in China, which has killed several hundred and could inflict serious damage on economic growth this year.
Oil markets, in particular, have been spooked by a recent Bloomberg report that Chinese demand has dropped by about three million barrels a day—roughly 20% of the nation’s daily demand late last year and 3% of global consumption. Brent crude oil prices have plunged from nearly $70 a barrel in early January to just $55 now.
Not everyone is convinced that a 20% drop in Chinese demand—if that is the current run-rate—is likely to be sustained. Energy consultancy Wood Mackenzie expects a much more modest decline of 450,000 barrels a day for the first quarter, or 3.5% from the fourth quarter of 2019. In a blog post published Tuesday, the company noted that quarantine measures are focused on restricting air and public transport, and that jet fuel as a whole accounts for only 7% of China’s total oil demand.
But this may be too sanguine. The transport and industrial sectors together account for around 70% of China’s petroleum demand, with the former now the main driver of growth. As long as factories get back to work over the next couple weeks—and trucks, ships and planes get back to work shipping their goods—the overall hit to oil demand will probably remain manageable. Ford Motor said Tuesday that, like many other industrial companies, it still hoped to resume most of its operations in China next week. But if this time frame proves optimistic and factory workers remain home for longer, the picture suddenly gets bleaker.
One additional reason for caution: There were already signs that Chinese oil-supply growth was running ahead of fundamental demand late last year. Growth in freight traffic had by November begun a weak recovery from the doldrums of mid-2019, but apparent petroleum demand—refinery runs plus net oil product imports—jumped nearly 14% year over year in December, the fastest growth since 2017. Watching trade tensions ease and the Lunar New Year approach, refiners may have stocked up fast in anticipation of holiday travel and a strong economic rebound.
If so, they could be digesting that inventory for a while—and investors exposed to the oil price could be in for a painful several months.
Write to Nathaniel Taplin at nathaniel.taplin@wsj.com
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As Coronavirus Spreads, China Chokes on Oil - The Wall Street Journal
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