In a market environment in which the majority of day-to-day traders are retired, moved on, or fired within a decade or less, the reaction to events of a type that have not been seen in that timescale tend to be overdone. This suits the more seasoned traders who decided not to retire but to trade on their own account or for hedge funds because they can let these less-experienced traders skew the price before stepping in and scooping up big profits from corrections based on reality. Indeed, a realistic examination of the actual figures involved in the current coronavirus (2019-nCoV) outbreak that began in China’s Wuhan province reveals that the true impact on the Chinese economy – the key bulwark of support for the oil price – is likely to be minimal. In fact, while there are many reasons to be short oil but the coronavirus is not one of them.
Leaving the hysteria of inexperience to one side for the moment, it is certainly true that the coronavirus has spread far beyond its initial outbreak radius around central Wuhan, with cases now having been reported in over 20 countries. It is equally true that at the time of writing this flu-like virus has caused around 900 deaths out of about 41,000 reported cases or a mortality rate of around 2 percent. Although it is always advisable to build in some sort of leeway into any figures – be they GDP growth or export numbers or imports of Iranian oil – that come from China, for seasoned market observers, in empirical terms each of the numerical elements are miniscule compared to other similar outbreaks.
In Asia itself, for example, the 1997 outbreak of H5N1 Bird Flu caused 455 deaths from 861 cases in 18 countries, a mortality rate of 52.8 percent, the 2013 H7N9 Bird Flu outbreak caused 616 deaths out of 1,568 cases, a mortality rate of 39.3 percent, and – according to the U.S.’s Centers for Disease Control and Prevention (CDC) - the 2009 H1N1 flu outbreak that began in Asia as well, resulted in around 274,304 hospitalizations and 12,469 deaths in the U.S. alone. According to a CDC report on 2012, the total number of deaths from the 2009 H1N1 was at least 284,500. As it stands right now, for those in the U.S., the mortality rate from the regular flu-like illnesses and related pneumonia is over three times higher – at around 7 percent – than from the coronavirus. Even the ‘lesser’ virus outbreaks that have started in or gathered pace in Asia or the Middle East have been much more virulent and deadly than the current coronavirus: 2012 MERS (2,494 cases, 858 deaths, 34.4 percent mortality rate), 2002 SARS (8,096 cases, 774 deaths, 9.6 percent mortality rate), and the 1998 Nipah virus (513 cases, 398 deaths, 77.6 percent mortality rate).
All of which means that the economic impact on China – the key global demand element in the global oil pricing matrix – will not be anywhere near as severe as many in the markets appear to think. Overall, Rory Green, Asia analyst for TS Lombard, in London, told OilPrice.com last week, expects just a one-off one and a half percentage point shock to China’s Q1 year-on-year GDP growth, necessitating pushing back the previous projection of an economic stabilization in Q1 back to Q2 this year instead.
“Beijing has improved its crisis management since the 2003 SARS virus and its reaction this time around to the coronavirus has been much quicker and more efficient,” he said. “The political pressure on Beijing is such that, once the virus is contained, China will launch a substantial stimulus package to more than offset the economic and political reputational cost of the quarantine,” he added. “Although there is very limited time in the calendar for households to take extended breaks - meaning that despite pent-up demand, 2020 full-year tourism, cinema and restaurant sales will be negatively impacted - in contrast, industry should recover quickly: industrial production, imports and exports will overshoot pre-virus growth trends in Q2 this year,” he underlined.
This said, in addition to the empirically illogical hysteria in much of the markets surrounding the potential impact of the coronavirus, there also appears to be some incorrect conflation in the oil pricing matrix of the – in reality- distinct elements of Chinese economic activity and Chinese demand for oil, which are not the same at all. Even if – as seems extremely unlikely, given the aforementioned factors – Chinese economic activity did fall off a cliff for a while, metaphorically speaking, it does not follow that it will import less oil, even if it is also refining less, although even the refinery part of the equation is a moot point.
It is a number of the independent refiners in China that have been hardest hit by the coronavirus but only because of factors such as being landlocked and/or having limited storage facilities. In Shandong, for example, the government has banned trucks registered in other provinces to ship out products, together with imposing other travel-related rules. By contrast, other refineries located along the coast and with extensive storage facilities have been able to maintain their usual high (100 percent plus) run rates, according to various independent sources, including the 400,000 barrels per day Hengli plant. In addition, the cheaper pricing and greater availability of oil elsewhere provide China with a tremendous opportunity to build its strategic petroleum reserve at a faster pace and at a lower price.
This would be entirely in line with the economic and philosophical model of China being implemented by President Xi Jinping, which is the practical application of the virtue of self-reliance, implemented through a broadening and deepening of the Communist Party mandate across all strategically important sectors of the economy, including of course oil and gas supplies. More specifically, as analyzed in depth in my new book on the global oil markets, China’s approach to securing energy flows is twofold. Firstly, it involves cultivating multi-layered relationships with countries that hold massive quantities of relatively cheap but high-quality oil and gas reserves that can absolutely be relied upon for decades to provide China with such energy flows (such as Iran and Iraq). Secondly, it involves developing China’s own oil and gas field reservoirs and, as an adjunct to this, continuing to build up its own strategic petroleum reserve in the meantime, just as the U.S. did before it discovered and recovered its own game-changing oil and gas shale resources.
China’s use of Iran and Iraq as proxy oil and gas resources can be realistically regarded as exactly the same template used by the U.S. when it had limited resources, in that case with the longstanding deal with Saudi Arabia. In sum, the understanding struck in 1945 between the then-U.S. President Franklin D. Roosevelt and the Saudi King at the time, Abdulaziz, onboard the U.S. Navy cruiser Quincy in the Great Bitter Lake segment of the Suez Canal was that the U.S. would receive all of the oil supplies it needed for as long as Saudi had oil in place, in return for which the U.S. would guarantee the security both of the country and of the ruling House of Saud. Recent deals between China and Iran and Iraq – before public outcry pushed them to the backburner – are exactly in this mold.