Extended coronavirus outbreak could lower oil demand, prices: Moody’s

By: |
February 06, 2020 5:28 PM

The outbreak of coronavirus has already led to suspended flight routes and quarantine of millions of people in China around its epicentre.

Moody's said while a short-term demand shock in China will significantly increase oil price volatility, prices would likely rebound once the spread of coronavirus infection is contained.Moody’s said while a short-term demand shock in China will significantly increase oil price volatility, prices would likely rebound once the spread of coronavirus infection is contained.

Global oil demand and prices will fall due to extended coronavirus outbreak, Moody’s Investors Services said on Thursday.

“The ongoing coronavirus outbreak has reduced economic activity in China, the world’s largest oil importer,” it said in a note. “Estimates of the short-term reduction in global oil demand have already proved deep enough to weaken crude prices in recent days”

Moody’s said while a short-term demand shock in China will significantly increase oil price volatility, prices would likely rebound once the spread of coronavirus infection is contained.

“However, it is difficult to ascertain how pervasive, widespread and severe the contagion will be before it is contained,” it said.

The outbreak of coronavirus has already led to suspended flight routes and quarantine of millions of people in China around its epicentre.

“An extended disruption of economic activity in China would also reverberate around the world given the size and interconnectedness of the Chinese economy. This disruption, in turn, would have a significant impact on global oil markets,” Moody’s said. “We would expect the rise in oil inventories to be potentially offset, at least to some degree, by cuts in supply.”

Still, a period of several months of slowing activity is likely to dampen oil prices for its duration, and perhaps beyond depending on the build-up in global inventories.

Weak commodity prices will reduce the profitability and credit metrics of exploration and production companies. Reduced activity levels will also hurt drillers and oilfield service companies, while reduced volumes will dampen midstream company earnings, it added.

China consumes about 14 million barrels of oil per day.

Coronavirus also threatens a material impact on global natural gas prices.

“While we do not yet know the severity of the coronavirus outbreak, which is still largely contained within China, a substantial increase in its scope globally would have significant negative implications for the energy market,” Moody’s said. “Past virus outbreaks did not hurt oil and gas demand as much, and while investors should be cautious, whether this time is different still remains to be seen.”

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