Wood Mackenzie consultant Yujiao Lei on the impact of the Wuhan coronavirus on oil demand
The ongoing coronavirus outbreak and subsequent large-scale quarantine measures are posing a major economic risk to China and beyond. With respect to the impact on oil demand, as preventive measures focus mainly on aviation and public passenger transport, jet fuel will be the most susceptible. The experience during the 2003 SARS outbreak suggests a severe and one-off impact to China’s demand for jet fuel and, to a lesser degree, gasoline and diesel.
Although the Chinese government has been taking action more swiftly in a more determined manner than in 2003, Chinese domestic and international transport activity is incomparably higher today and thus the impact may be larger. For Q1 2020, China’s oil demand could be reduced by over 250,000 bpd. Taking into account adjustments to other regions for separate reasons also, we have adjusted Q1 2020 world oil demand lower by 0.5 million bpd.
We expect oil demand to gain strength and start to recover after the first quarter, especially in the second half of 2020.
The nature of currently implemented preventive measures, and China’s oil demand trajectory during the SARS epidemic in 2003, lead us to the following viewpoints to possible impacts of the current outbreak.
- The ongoing coronavirus outbreak will likely be a one-off event, with its effect on oil demand focusing mainly on jet demand principally in China and to a lesser degree in East/Southeast Asia. The impact on the other regions will likely be relatively modest.
- Chinese overseas travel increased from 20 million in 2003 to around 150 million in 2018 in terms of person-times. In 2018, Asia (predominantly East/Southeast Asia) accounted for nearly 90 per cent of Chinese overseas travels. As a survey shows that more than half of Chinese overseas travellers prefer group tours, the ban on tour packages will severely restrain the number of Chinese visitors to popular destinations in East/Southeast Asia, such as Japan and Thailand.
- Gasoline demand will likely be less affected by travel restrictions per ser, except in the areas where the use of cars is newly restricted as a preventive measure against the epidemic. Gasoline demand, though, will likely be more susceptible to precautions taken voluntarily by consumers and businesses to avoid large crowds. People’s reluctance to spend time in crowded areas would restrain retail businesses and social events, further discouraging consumers from making trips. Besides, many companies are encouraging telecommuting to their employees, reducing the need for driving too.
- As the imposed transport restrictions focus principally on public passenger transport, the impact on freight transport will likely depend on overall industrial and economic activity in China. If the severe transport restrictions such as those implemented in Wuhan linger, they would also restrain the affected local economy. Clusters of automotive manufacturing and high-tech industries are located in Wuhan, while Hubei Province accounts for over 4 per cent of China’s GDP. Meanwhile, China’s diesel demand is led principally by road freight, and unlike in 2003 when China was in the middle of resource/materials-intensive industrialization, road diesel demand has been weakening already since 2019. This weakness would be exacerbated by a slowed economy.
- The impact on the use of petrochemical feedstock will likely depend mainly on the overall status of manufacturing as well as private consumption. Since China is a net importer of ethylene/propylene derivatives, if China’s domestic petrochemical demand slows, it will likely first lead to a reduction in imports of petrochemical goods, affecting global operation of derivative exporters to China. Based on the viewpoints above, we currently expect China’s total in-land oil demand (excluding the marine sector) to grow by 150,000 bpd year on year in Q1 2020, a downward revision by over 250,000 bpd from our previous outlook in the early January 2020. For jet, gasoline and diesel/gasoil combined, in particular, demand is expected to fall by 100,000 bpd in Q1 2020. The low growth in total demand compares with annual average growth for China of over 300,000 b/d in 2019. Based on the assumption that the current outbreak will be largely contained within the coming few months, China’s total demand is expected to gain strength especially in the second half of the year, led mainly by petrochemical feedstock. For 2020 in total, our current forecast is for the coronavirus to lower our forecast for global oil demand by more than 100,000 bpd on an annual average basis to a projected gain of 1.2 million bpd for the year, but the risks are clearly on the downside.