Coronavirus continues to reduce global oil demands and prices

When I wrote about coronavirus in this column six weeks ago, it was about an impending threat to the global economy whose impact on energy and oil demands was going to be harsh.

At the time the virus was just gaining momentum and mostly confined to China with about 17,000 cases of infection and about 300 deaths with no cases outside China. Brent crude oil prices had just dropped from about $65 to $55 per barrel

Since then, the virus has spread to more than 90 countries with total cases reaching 106,000 and 3,600 deaths. Oil prices have correspondingly dropped to below $50 last week and a further deep drop to $33 this week.

There are two stories here. The first is about a continuing real decrease in oil demands in China and across the world as s result of coronavirus, and the second is about an oil price war among major oil producers which started last week for control of global oil market shares in a scenario of decreasing oil demands driven by the virus.

With limited scientific facts about the nature of coronavirus, the fear of the unknown continues to prompt decisions and actions by governments, organisations, and individuals across the world to protect those under their responsibility. And any decisions and actions taken in one country are impacting other countries, especially in areas of travel and trade.

Specifically, China’s exports have shrunk by 17percent over the first two months of this year, and this has a major impact on the global economy and energy/oil demands. Reduced industrial production and exports have resulted in lower oil demands and imports with refineries adjusting their runs to reduce the production of transportation fuels, especially Jet fuels.

Specifically, here in Kenya, as the country restricts travel to and from coronavirus affected destinations, and as tourism and international conferencing decline, there will be a real reduction in aviation fuels demands. Further, as imports and exports of goods to and from virus impacted destinations reduce, there will be economic erosion in Kenya.

The second story revolves around OPEC (Organisation of Petroleum Exporting Countries) and its allied oil producers. Before the coronavirus came about, the world was already awash with surplus oil, and prices were finding it difficult to stabilise. This led the oil producers to contrive agreements to voluntarily reduce the amount of oil they put into the market to protect oil prices.

Last week there was a push fronted mainly by Saudi Arabia for OPEC and its allies to reduce oil production by a further 1.5 million barrels per day to provide additional price cushion against the impacts of coronavirus. And Russia refused to oblige. In bravado retaliation, Saudi Arabia unilaterally reduced its official selling prices and opened the production infrastructure valves to deliver more oil into the export markets. And global oil prices dropped to $33 over the last weekend.

I think the Saudi action was rushed and may not be sustainable in the short and medium-term. It will create economic and even political problems in the oil-producing countries (including Saudi Arabia) as they fail to balance their national budgets. The decision will also attract silent diplomatic anger from the US as shale oil producers find it hard to sustain production at low prices.

Back here in Kenya, with the appointment of Cabinet Secretary for Health, Mutahi Kagwe, the country is feeling more reassured about coronavirus. The CS looks all set to do the right and necessary things to keep the virus out of Kenya, and to minimise its spread should it land here. The CS should be allocated as much budget as he requires to fully implement his plans which should be as cost-effective as possible.

Getting it right the first time is important in coronavirus decision making and actions to avoid worst-case scenarios which can bring about serious socio-economic disruptions. This is why the public, as the principal stakeholders, must be ready to accept and accommodate inconveniences created by protective and prohibitive instructions from the authorities.

In the meantime, let us enjoy the unfolding low oil prices while they last.