The economic consequences of China’s growing isolation caused by the coronavirus are becoming more severe by the day. Russia will earn less from oil exports, Poland will buy it cheaper and LNG prices will drop. Nobody knows how long this will continue – writes Wojciech Jakóbik, editor in chief at BiznesAlert.pl.
Alexei Kudrin, the head of Russia’s Accounts Chamber (a state audit office), admitted that a drop in oil exports from Russia to China was likely due to the coronavirus outbreak. The situation is so serious that OPEC+ is considering deeper cuts to the oil agreement in order to increase the price, that will keep going down due to the drop in demand in China. Beijing is currently isolating the country from physical deliveries to prevent further spread of the virus which is spinning out of control. This is why CNOOC was not able to collect three LNG shipments to China and used the ‘force majeure’ argument to withdraw from the contract. Other scheduled cargoes may share this fate in the coming week. The Chinese are limiting interactions between people, some companies ordered their employees to stay at home and parts of the country were cut off from the world. Access to information is limited, which is a testimony to the nature of the communist regime.
In 2019 oil imports to China hit a record high 17th time in a row. It went up by 9.5% in comparison to 2018 and amounted to 506 m tons (i.e. 10.12 m barrels a day). China was the biggest oil importer in the world. Also in 2019 China competed with Japan to become world’s leading LNG buyer. In December Beijing imported 7.198 m tons of LNG (up by 16%) whereas Tokyo bought 6.574 m tons. According to a forecast by Wood Mackenzie, China will beat Japan at this race because Tokyo will restart its nuclear power plants and develop renewable energy resources, which decrease dependence on LNG. It seems the coronavirus may impede this development, but it’s impossible to tell for how long. The Chinese government extended the Chinese New Year’s celebrations until the end of the week. This means that the resistance of the Chinese economy against the coronavirus will be tested on Monday the 10th of February.
The oil barrel price has already dropped by about USD 10 in comparison to New Year’s. Brent is at about USD 55 and WTI at 51. LNG spot selling prices in Asia have also dropped and are estimated at USD 3.8 per mmBTU for March deliveries. Experts expect a further drop, even under USD 3. It remains to be seen whether issues with collecting deliveries will continue, but that could further lower the price. A quick look at the data shows that the raw materials market dip started a few days after the coronavirus outbreak. This was around the 24th of January when the World Health Organization published recommendations for the Coronavirus Emergency Committee advising special precautions. A day earlier all flights and all land transport of goods and people from the cities of Wuhan, Huanggang, Ezhou, Zhijang, Qianjiang, Chibi, Xiantao was stopped. The virus had reportedly spread from those places.
The impact of the coronavirrus on oil and gas prices will depend on how efficient the Chinese authorities will be at combating the virus. The WHO ensured the public opinion that Beijing was handling the situation well, but experts versed in the communist regime claim it has many limitations caused by the barriers to information. If this unfortunate situation persists, raw materials buyers in Poland will see lower prices, but the world economy may slow down and thus, accelerate the coming of the next economic crisis that some economists have been warning about.