When China sneezes…

2020 looked to be off to a good start for China. But as the Year of the Pig ended, celebrations to welcome the Year of the Rat were marred by the outbreak of the novel coronavirus (2019-nCoV). Beijing’s efforts to control the spread of the virus are set to weigh on economic activity as well as energy demand through H1 20. Assessing the economic, and therefore energy, impact of the coronavirus is no easy feat. Comparisons with the SARS outbreak in 2003 offer only limited insights as China’s economic structure and policy trajectory have changed dramatically and its global weight increased. Preliminary conclusions, however, suggest that China’s oil demand in Q1 20 could fall by 0.50-0.70 mb/d y/y, with the lost demand weighted toward jet and gasoline due to the heavy travel restrictions in place. Diesel and natural gas demand are also set to fall in Q1 20 but the medium-term impact will depend greatly on the length of the industrial shutdowns and the provinces that remain under quarantine. Moreover, the one-off hit to transportation demand during the holiday season cannot be recovered later, but industrial activity can make up for earlier losses. As China’s domestic end product demand plummets in the next month, refiners will need to export excess products, suggesting a strong uptick in outflows, especially given that they had stocked in preparation of the Lunar New Year. Moreover, refiners are set to cut runs by as much as 2 mb/d in February and March, suggesting that crude imports are also set to plummet, further complicating China’s pledges to increase imports for US crude.

Natural gas demand will also be dented in the near term by the industrial outages just as travel restrictions are also making LNG trucking more complicated. Moreover, given that inventories at the LNG import terminals tend to by high ahead of the Lunar New Year holiday, the reduced demand currently is leading buyers to defer cargoes. While both oil and gas demand are set to soften considerably in Q1 20, with some weakness persisting in Q2 20 (assuming that the outbreak is brought under control within weeks), the question will increasingly be: how strong will the H2 20 recovery be? The government’s pledged goal to double per capita incomes from 2010 levels would require a massive stimulus that could prove detrimental for China’s medium-term growth.

By: Michal Meidan