If you haven’t heard of the word ‘coronavirus’ or ‘Covid-19’ in recent weeks, then you are an exception, because news broadcasts have been rife with updates, with each detailing another cancellation or disruption. The Rugby Six Nations Championship, Seoul Fashion Week, and the Mobile World Congress are just some of the events that have pulled the plug, and now there is uncertainty over the Tokyo Olympic Games, where there have been suggestions of complete cancellation if the virus is not contained by the end of May (the event takes place in July).
The World Health Organisation (WHO) has declared the virus outbreak an emergency, with 2770 fatalities since it was first recorded on 31 December 2019 in Wuhan, China. A respiratory illness that is spread from person to person, the invisible country borders are no hurdle for a virus, since more than 81 800 people have been infected across 43 countries, and the situation does not seem to be slowing.
The oil and gas industry has also fallen victim to the coronavirus, with construction projects stopped over concern for workforce health and production halted at refineries. Chinese company CNODC – a joint venture of CNPC and PetroChina – has paused construction of the Niger-Benin pipeline just one month after the JV received the necessary construction permit for the pipeline from the Niger government. This action was taken due to fears that specialist staff from China could be carrying the virus into West Africa. If coronavirus was to spread into countries with weaker health systems, for instance many African nations, this could have cataclysmic consequences.
China’s demand for crude has dropped as a result of coronavirus, causing refining rates to be reduced and oil prices to fall. Nigeria has seen its cargoes to China face restriction, forcing the country to increase its dependence on demand from Europe. Further, Nigeria’s state oil company, NNPC, has cut its March oil prices by $US0.50/bbl, as it anticipates the continued fallout from the virus. China is unusually flooded with product, which is impacting the global oil market, so production is being changed. Sinopec Corp. and China National Offshore Oil Company (CNOOC) have already scaled back their refinery production, and PetroChina is next to follow.
The LNG industry is also suffering, with CNOOC (China’s largest buyer of LNG) declaring force majeure, whereby it can refuse delivery of some LNG cargoes. Force majeure can exempt companies from being penalised for not honouring their contractual obligations due to uncontrollable events such as natural disasters. CNOOC claimed that coronavirus is hindering its ability to accept shipments from some oil companies – a claim that has been rejected by two companies involved: Total and Royal Dutch Shell. CNOOC is not alone in applying for a force majeure certificate, since 3000 other certificates were issued in China within the first few weeks of February. These certificates do not actually guarantee that a force majeure claim will be successful, but their increased issuance is evidence of the unease companies are faced with.
Traders and analysts are unsure how to anticipate the continued effect of the virus on global oil demand. 2020 began on a positive note for the industry, with the US-China trade war seeing some resolution on tariffs, but the coronavirus outbreak has dampened this positivity. The price of Brent is currently 5.73% down on its 30 January value – the date the WHO declared the virus a global emergency.1 More specifically, US crude is at its lowest price in more than a year. Whilst the WHO insists that coronavirus is not yet a pandemic, its global reach is remarkable. The world is more connected today than ever before, with cross-border trade and travel the norm. Consequently, the virus is incomparable with outbreaks of the past, and what the forthcoming weeks hold, we cannot predict.
- Fortune, ‘Oil demand was set to rise in 2020, then the coronavirus outbreak hit’, 26 February 2020.