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Ideas & Debate

Why coronavirus crisis is pushing oil prices down

Citizens wear masks to defend against Coronavirus
Citizens wear masks to defend against Coronavirus on January 22,2020 in Guangzhou, China. The break out of the virus is causing shockwaves across the world . PHOTO | Stringer / Anadolu Agency 

As the outbreak of Coronavirus in China intensified, Brent crude oil prices dropped from $65 to a low of $56, a more than 10 percent drop within a fortnight which is the largest oil price change in recent months. This is due to real fears that the virus outbreak will significantly slow down the Chinese and global economies which are closely inter-linked. Depressed economies mean reduced oil demands and lower prices as the world continues to swim in a pool of oil over-supply.

As the global Coronavirus emergency was being declared last week, over 300 deaths had been reported, with over 17,000 infections confirmed, and the spread of infections to over 20 countries reported. Global impacts by the virus cannot be underestimated as individual countries around the world take precautionary measures which directly and indirectly slow down overall global economy.

China is the engine room of the world, the second largest global economy and a key consumer and importer of oil. Until preventive and curative measures for the virus are fully developed, the virus will remain a major socio-economic threat to the entire world, not just China. Significant economic downturn in China is already being experienced as human and business activities are limited by official and voluntary lockdowns.

Internationally, flights and shipping into and out of China have been significantly reduced or entirely banned to curtail human contact to limit global spread of the virus. For instance, shipments of oil from Latin America to China have been suspended by Brazil and Columbia as precautions against the virus. All these prohibitive measures are negatively impacting global trade and economic performance, while reducing energy and oil demands

Specifically, it is the jet fuels demands that will be most impacted by reduced flights to and from China, while diesel and gasoline demands will be affected by Chinese travel restrictions and lockdowns. As international shipping reduces it impacts imports and exports which reduces manufacturing and industrial energy uptake.

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The virus calamity has only made a limping Chinese economy much worse. The long drawn-out trade dispute between China and USA had already weighed down the Chinese economy. The trade benefits anticipated from the Phase One China/USA deal signed last month will certainly be diluted by the virus outbreak. To stabilise the economy and reassure investors, the Chinese central bank is already pumping billions of dollars into the economy.

The world was already over-supplied with oil and global demands were limping before the outbreak of the virus. When Libya lost as much as one million barrels per day of oil exports last month due to the ongoing military hostilities, the oil markets remained unperturbed. Further, the ongoing global oil supply shortfalls from Iran economic sanctions continue to be comfortably balanced by oil from new sources, like increased US shale production and new production from Guyana.

Will the Organization of Petroleum Exporting Countries (OPEC) intervene with further self imposed oil production cuts? Already reductions amounting to 1.6 million barrels per day are in force until end of March this year. To safeguard oil prices from further drop, the OPEC may vote for more production cuts and/or extend the timeline to beyond March. If they do not do this we are likely to see oil prices drop to below $50, which is good for countries like Kenya which are net oil importers.

Since Kenya discovered oil in 2012, the subject of oil prices has always been a dichotomy — higher prices encouraged development of Turkana oil, while they hurt consumers and the economy. However with the recent dithering by the Turkana oil investors who are planning to partially divest from Turkana, sympathies are definitely with low oil prices. If at $65 the investor economics were not good enough, it will be a disaster for them and Turkana oil when prices rush down to $50.

Finally, sincere prayers are that Coronavirus solutions are found sooner than later. Kenya is part of the global economy, and when the Chinese economy is down, our will also be down. Coronavirus may turn out to the single most impactful global event in 2020.

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