Wednesday 19 February 2020
 
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ANALYSIS

Oil markets hit with coronavirus concerns: Barclays

MANAMA, 21 days ago

Concerns around the spread of the coronavirus, which has now infected more than 2,700 people worldwide and resulted in 82 deaths so far, have infected oil markets as well, said Barclays in a new report.

Market participants, already wary of slow demand growth from last year, are weighing the effects on global oil demand of the lockdown in several cities in China and likely reduced travelling in the broader Asia-Pacific region.

Oil prices have corrected almost 10 per cent since the announcement of contagion-mitigating measures by the Chinese government on 20 January. “If the 2003 SARS outbreak is any indication, we think that the market has likely overreacted, partly due to stretched positioning and a lacklustre global macro economic backdrop,” the report said.

Demand worries are warranted, but likely overdone: Several questions remain unanswered about the potential fallout from the coronavirus, but if the experience from the 2003 SARS outbreak is any indication, demand worries are likely overdone.

Air passenger traffic dropped by nearly half on the year in Q2 2003, when the SARS virus broke out, and highway passenger and freight traffic declined by about 25 per cent and 10 per cent y/y, respectively, during the quarter, followed by a sharp rebound.  A lot has changed in China's transport industry since then. The country's air passenger traffic (passenger-km) has grown almost 10 times and accounted for more than a third of all passenger traffic last year, compared with less than 10 per cent in 2003, according to data from the NBS.

At the same time, the reliance on road vehicles for public transport has reduced due to significant strides in rail infrastructure as well. The share of passenger traffic on railways has grown by more than 8pp since 2003 to more than 41 per cent last year.

If air passenger traffic in China declined by half in Q1 20, it would likely lead to a 300 kb/d y/y decline in jet-kerosene demand from China, all else equal. The fall in road transport will likely be less dramatic than in the past, but still meaningful, given reduced reliance on buses for public transport.

“Compounding the effects of the spillover to economic growth from China and the region, we expect transitory oil demand erosion of about 0.6-0.8 millions of barrels per day (mb/d) in Q1 20, or 0.2 mb/d for the full year, which is less than 0.2 per cent of global demand by our estimates,” Barclays said in the report.

All else equal, this scenario would imply a $2/b downside to our full-year Brent and WTI forecasts of $62/b and $57/b, respectively, compared with the current curve pricing of $56/b and $52/b, for Brent and WTI, respectively.

The coronavirus has so far proven to be less lethal than the 2003 SARS virus, and Chinese authorities have been relatively more proactive in mitigating the spread. These two factors, coupled with the significant improvements in technology and increased penetration of services such as online shopping and cloud workspaces, mean that the actual economic fallout from the coronavirus could be less severe than the 2003 SARS outbreak.

However, the fact that the contagion has coincided with the Lunar New Year travel season will likely offset these factors to a great extent. If the demand erosion is more acute, we expect the Opec+ producers, which recently adopted a more aggressive approach to balancing the market in our view

“Geopolitical risks to supplies are not retrenching: On the other hand, geopolitical risks to global supplies remain high. As described in our recent Blue Drum, we believe continued gradual escalation is the most likely outcome as far as the US-Iran tensions are concerned, which might lead to a material escalation or a ‘black swan’ event.

“At the same time, oil production in Libya has plummeted by almost 1 mb/d over the past couple of weeks and could fall further if the blockade of key infrastructure facilities by LNA-backed forces continues. Yet relatively stretched positioning has likely played a role in the recent selloff, in our view,” Barclays said. – TradeArabia News Service




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