As the industry banks on strong demand growth to overcome abundant supply, China, the epicenter of the disease, has been cherished as the engine of that consumption. Last year, when it imported more oil crude than any country ever, the Asian giant accounted for two-thirds of all new oil demand globally.
That’s now at risk as the government locks down cities and shuts transportation networks in an effort to contain the virus that’s already infected thousands, while flight cancellations stack up.
Once-bustling streets in Wuhan, a city of 11 million and the epicenter of the virus, are now quiet after the government ordered a quarantine there and in several other cities. That province accounts for about 5% of the country’s gasoline consumption, according to Sanford C. Bernstein & Co. analysts. Videos taken by residents show empty streets and abandoned gas stations.
A drop in gasoline, jet fuel and diesel use means that Chinese oil refineries will likely cut their run rates, leading to reduced demand growth for crude oil. Data from the International Energy Agency show just such a dip at the peak of the SARS outbreak in 2003, along with a corresponding drop in the increase in global consumption.
But China’s importance to the global oil market has only increased since then. The nation’s demand has expanded every year since the SARS outbreak, still rising even when global demand fell during the 2008-2009 financial crisis. On average, the country has accounted for about 40% of annual global consumption growth over that period.
Also, its share of global oil consumption has doubled since 2003, from 7% to a forecast of 14% this year, according the IEA. It surpassed the U.S. as the world’s top oil importer in 2017 and last year took in more foreign crude than America ever did at its import peak.
One place to see the difference between 2003 and now is in air travel. As China’s economy has grown and people have become more wealthy, traveling abroad grew more popular. For example, about 8 million Chinese residents visited Japan in 2018, compared to fewer than 500,000 in 2002, according to government data. China’s share of global jet demand has risen from 3.8% in 2003 to 12% in 2017, according to Citigroup Inc.
Now several airlines have announced halts of service to China, and flights within the country have slowed since the government put in place quarantines. Quieter runways could reduce global jet fuel demand by 618,000 to 1 million barrels a day in February, according to S&P Global Platts Analytics.
The drop in jet fuel use is compounded by a weakness in diesel, as companies from Ikea to Uniqlo to McDonald’s shutter hundreds of stores across China, reducing the need to truck goods across the country’s highways. That’s adding to the woes of refiners who have been disappointed with lackluster middle distillate demand from new shipping rules. The profit for making gasoil from Dubai crude in Asia has dropped 30% this year.
The virus is hitting at a vulnerable time for the oil market. Prices had been crawling back amid optimism that a U.S.-China trade deal could spur demand and, along with production cuts from OPEC and its partners, help shrink a supply overhang. Brent has fallen more than 9% to below $60 since Jan. 20, when concerns about the virus began to grow. It could tumble to the low $50s by the end of summer if slower Chinese demand growth causes stockpiles to surge again, according to Bernstein.
China’s oil demand will probably increase by just 100,000 barrels a day this year, Bernstein analysts added, below a pre-virus projection for 350,000 barrels a day. A 100,000-barrel-a-day gain would be the smallest since 2001, according to BP Plc data.
“In a certain sense the markets are waiting to see what’s the next shoe to drop,” said Marshall Steeves, an energy markets analyst with IHS Markit. “SARS was 17 years ago and it’s a different environment now, China is all that more important than it was then so there’s caution.”
