Coronavirus Could Push Global Oil Market into Surplus


Tuesday, February 04, 2020   /09:20 AM  / By Fitch Ratings / Header Image Credit:  Reuters


The coronavirus outbreak could curb oil demand growth if it continues to spread, leading to an extended production surplus as production grows in Brazil, Norway and the US, Fitch Ratings says. The surplus magnitude will depend on the duration of the outbreak and the ability of OPEC+ countries to adjust production levels, if required. We expect oil prices to remain highly volatile in 2020, with geopolitical tensions and economic sentiment being other key drivers.


Oil prices have been under pressure since the start of the coronavirus outbreak with Brent crude falling from just under USD70 a barrel in early January to about USD56/bbl in early February.


In a scenario of materially lower oil prices than assumed in our price deck and weaker market sentiment it could become more challenging for the 'B'-category oil and gas issuers to access capital markets, potentially resulting in a higher default rate in the sector. Ratings of Chinese national oil companies, namely CNPC/PetroChina, Sinopec, and CNOOC are linked to China's sovereign rating and would therefore not be immediately affected, despite weakening credit metrics. Asian refiners could see further softening of refining margins due to lower demand and utilisation rates.


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Oil demand losses are difficult to estimate at this stage, but would come from a combination of reduced air travel, lower domestic road transportation and a longer-than-expected halt of manufacturing activities. The Chinese authorities have extended the Lunar New Year holidays and quarantined about 50 million people living in the Hubei province, which remains the hardest hit. Several other provinces have restricted inter-provincial travel and advised companies to remain closed for at least a week.


The impact on Chinese domestic oil products consumption will depend on how quickly transportation and industrial activities will return to normal levels. Demand for imported oil could take even longer to recover, as refineries, which were facing a capacity surplus before the outbreak, will need to absorb excess inventories. The WHO's declaration of a public health emergency of international concern could dampen China's trade activities and further reduce domestic fuel consumption, with a more tangible impact on global oil supply-demand balance.


China accounts for about 15% of global oil consumption and is the main driver of global demand growth. Its contribution to global consumption growth averaged 36% over the past five years and should have been close to 40% in 2020, according to the US Energy Information Administration (EIA). A further 30% of demand growth is driven by other Asian countries, including India.


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Even without potential consequences from coronavirus, the oil market was expected to be well supplied in 2020. EIA expected supply to exceed demand by about 250,000 barrels a day due to growing production in the US, Brazil, Norway and Guyana. The additional OPEC+ production cuts agreed for 1Q20 may not fully offset this.


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If the coronavirus outbreak deteriorates, the oversupply could become more significant, particularly in 1H20, potentially leading to more short-term pressure on oil prices. A drop in production in Libya following the military conflict in the country could mitigate oversupply, although it is not clear how long Libyan production will remain depressed. OPEC+ policies to manage production in line with demand and price sensitivity of US shale make a protracted dip of oil prices below USD50/bbl for Brent not very likely even in a stress-case scenario. However, OPEC+ may need to cut production further if the outbreak lasts for several months.


We rate oil and gas companies using our price deck of USD62.5/bbl in 2020, USD60/bbl in 2021 and USD57.5/bbl in 2022 and beyond, and thanks to realised cost-cutting measures most oil and gas producers feel comfortable with prices between USD50/bbl and USD60/bbl for Brent.


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