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Coronavirus and Oil: Why Crude Has Been Hit Hard: Why Have Global Oil Prices Fallen So Much?

The coronavirus outbreak in China has significantly reduced oil demand as factories, offices, and transportation have shut down. This has caused a 20% drop in China's daily oil consumption, equivalent to the needs of the UK and Italy combined. In response, global oil prices have fallen by 20% to their lowest level in a year. With lower demand and falling prices, OPEC and allied oil producers are expected to meet this week to discuss cuts to oil production in order to boost prices. A cut of 500,000 to 1 million barrels per day is expected. The sharp drop in Chinese and global oil demand signals a slowing of China's economy and the world economy due to the coronavirus outbreak.

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36 views2 pages

Coronavirus and Oil: Why Crude Has Been Hit Hard: Why Have Global Oil Prices Fallen So Much?

The coronavirus outbreak in China has significantly reduced oil demand as factories, offices, and transportation have shut down. This has caused a 20% drop in China's daily oil consumption, equivalent to the needs of the UK and Italy combined. In response, global oil prices have fallen by 20% to their lowest level in a year. With lower demand and falling prices, OPEC and allied oil producers are expected to meet this week to discuss cuts to oil production in order to boost prices. A cut of 500,000 to 1 million barrels per day is expected. The sharp drop in Chinese and global oil demand signals a slowing of China's economy and the world economy due to the coronavirus outbreak.

Uploaded by

ALex Lim
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Coronavirus and oil: Why crude has been hit hard

4 February 2020

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The world's biggest oil producers could be about to slash output as they grapple with the fallout
of the coronavirus.

Representatives of oil producers' cartel Opec and its allies are expected to meet this week as calls grow
for action to support oil prices. The cost of crude has hit its lowest level in a year after falling 20%
since its peak in January.

Why have global oil prices fallen so much?


The spread of the coronavirus means the Lunar
New Year holiday has been extended in much
of China and travel restrictions are in place. As
a result, factories, offices and shops remain
shut. That means the world's biggest importer
of crude oil, which usually consumes about 14
million barrels a day, needs a lot less oil to
power machinery, fuel vehicles, and keep the
lights on.

The outbreak is likely to have a particularly


large impact on demand for jet fuel as airlines
around the world suspend flights to China, and
travel restrictions within the country mean far fewer flights. Bloomberg reported this week that China's
daily crude consumption had slumped by 20%, the equivalent of the UK and Italy's oil needs
combined.

In response, Asia's largest oil refiner Sinopec, which is owned by the Chinese government, has cut the
amount of crude it is processing by about 600,000 barrels per day, or 12%, its biggest cut in more than
a decade. The scale of the fall has shocked the energy industry, according to Chicago-based oil analyst
Phil Flynn: "We have not seen a demand destruction event of this scale that moves this quickly."

What does this tell us about the outbreak's impact on the global economy?
The sharp fall in oil demand is a clear symptom of a drop in business activity in China and a sign that
the country's economic growth, which was already at a three decade low, will slow further. Zhang
Ming, an economist at government-backed think-tank the Chinese Academy of Social Sciences, has
said the outbreak could push the country's annual economic growth below 5% for the first three
months of the year.

China is the world's second largest economy and a key engine of global economic growth. Any
negative impact in China is almost certain to ripple across the world.

This week the managing director of the International Monetary Fund, Kristalina Georgieva, said the
epidemic was likely to slow world economic growth in at least the short term, but cautioned that it was

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still too early to tell further ahead: "We have to assess how quickly action is being taken to contain the
spread of coronavirus and how effective this action is."

What are oil producers expected to do?


The world's biggest oil producers are said to be discussing more production cuts, on top of those which
have been in place since 2016, to boost falling prices. On Monday, Opec member Iran publicly called
for measures to support oil prices as the coronavirus hit demand.

The statement came as so-called Opec+, which includes Russia, will reportedly discuss output cuts of
between 500,000 and one million barrels a day at a meeting that is expected to take place this week.
Margaret Yang from CMC Markets said the market was expecting production to be cut by a 500,000
barrels a day, but added: "We won't rule out an even deeper cut should the situation worsen."

Source: https://www.bbc.com/news/business-51353146?intlink_from_url=https://www.bbc.com/news/topics/cmjpj223708t/oil&link_location=live-
reporting-story

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