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COVID-19 and the Asian Oil Industry

With the emergence of COVID-19, a novel coronavirus, in Wuhan, China, there has been a noticeable drop in the price of crude oil. Due to the notoriety of the past severe acute respiratory syndrome (SARS) in 2003 [1], the world and especially China has been on alert.

In a bid to limit the spread of the coronavirus, China has placed a quarantine on Wuhan and its neighboring cities, affecting approximately 50 million people [2]. The quarantine has severely limited travel within and outside of China, lowering the energy required for transportation on a global scale. Additionally, Chinese factories closed for the Lunar New Year (January 24-30) and would reopen on February 9 [3] to account for the coronavirus. Without active factories, China, as a hub of manufacturing, no longer requires the import of crude oil as in the past. The Energy Information Administration estimates China’s petroleum and liquid fuels demand will reduce 190,000 barrels per day [4] according to trends in the coronavirus.

Other countries that are affected significantly by the coronavirus include South Korea, Japan, and Singapore. Japan has seen the lowest activity from its factories from the last seven years [5] and Singapore prime minister, Lee Hsien Loong, warned of a possible recession due to the virus [6]. Both scenarios will lead to a direct decrease in demand for oil. Yet, companies in Daegu, the epicenter of coronavirus in Korea, have cautiously continued operation of factories [7]. Despite this attempt to maintain the economy of Korea, the overall demand for oil is dropping, especially fuel sources for transportation and energy.

In response to lowered demand, OPEC has seen a steep price decrease since the beginning of 2020, dropping from 68.86 USD on January 10 to 55.18 USD on February 7 [8]. This drop in price has prompted oil producers in the Middle East to urge buyers to take more crude oil [9]. While, oil and gas companies in India will also face a similar drop in profits [10] until the economies of many countries, notably China, recover.

To sustain the Chinese economy, Xi Jinping has urged companies to restart production [11], which should increase demand for oil in the coming days. And as of February 17, according to The New York Times, a few companies like Airbus and Toyota have attempted to reopen factories [12]. Yet, if countries such as Singapore, begin to fall into recession, the impact of coronavirus on the oil industry may continue. With factories restarting operation, the price of oil will increase; however, since the coronavirus is not yet fully researched, a relapse of new cases may continue to depress the oil industry.

References:

Figure 1: NPA Urges FDA: Take Action Against Coronavirus Claims (Source: WholeFoodsMagazine.com)

[1] https://www.cdc.gov/about/history/sars/timeline.htm

[2]https://www.businessinsider.com/wuhan-coronavirus-officials-quarantine-entire-city-2020-1

[3] https://www.forbes.com/sites/siminamistreanu/2020/02/23/chinas-factories-are-reeling-from-forced-coronavirus-closures/#4be412f373f2

[4] https://www.eia.gov/petroleum/weekly/archive/2020/200212/includes/analysis_print.php

[5] https://www.reuters.com/article/us-china-health/coronavirus-infects-hundreds-in-chinas-prisons-as-global-markets-take-hit-idUSKBN20F01P

[6] https://www.reuters.com/article/us-china-health-singapore-economy/singapore-pm-says-recession-possible-due-to-coronavirus-outbreak-idUSKBN2080MM

[7] https://www.reuters.com/article/us-china-health-southkorea-business/some-samsung-hyundai-workers-self-quarantine-as-korean-inc-braces-for-virus-impact-idUSKCN20I0F8

[8] https://www.opec.org/opec_web/en/data_graphs/40.htm

[9] https://www.reuters.com/article/us-china-health-energy/coronavirus-hits-demand-for-oil-energy-idUSKBN2072EC

[10] https://economictimes.indiatimes.com/markets/stocks/news/coronavirus-impact-a-long-shutdown-in-china-will-leave-a-mark-on-key-sectors/articleshow/74218270.cms

[11]https://www.bloomberg.com/news/articles/2020-02-23/china-is-pushing-factories-to-resume-even-as-death-toll-rises

[12]https://www.nytimes.com/2020/02/17/business/china-coronavirus-economy.html