Breakingviews - Virus reveals China as global oil’s swing consumer

A foreman wearing a face mask works as a cargo ship docks at a container terminal of Qingdao port in Shandong province, China while the country is hit by an outbreak of the new coronavirus, February 4, 2020.

LONDON (Reuters Breakingviews) - China’s virus crisis is highlighting the country’s role as oil’s swing consumer. Crude-watchers often see Saudi Arabia as the swing producer in the 100 million barrel per day industry, given its 10% share of the global market and control over the biggest chunk of spare capacity. As demand from the People’s Republic shrinks and the oil price sinks to $55 a barrel, the challenge is working out what to anticipate from the world’s biggest oil importer.

China had been expected to consume 13.7 million bpd of crude in the first three months of 2020, according to Jefferies estimates. That’s second only to the United States, but without the latter’s huge domestic output. Those forecasts are now in shreds. Chinese consumption may fall by 25% in February – equivalent to more than 3 million bpd - the Financial Times reported on Wednesday. That’s a big problem given that the country accounts for 14% of global oil demand - double what it consumed at the time of the SARS virus in 2003.

It’s a particular headache for China’s biggest oil supplier. Saudi Arabian exports to the country rose to 1.7 million bpd in 2019. Were the Organization of the Petroleum Exporting Countries, and associates like Russia, to extend an output reduction of 500,000 bpd agreed in December, or shrink production by the same amount again, the global price may start to recover.

If China’s sudden demand reduction endures, a new cut might not be enough. Yet if the coronavirus follows a similar path to SARS, oil producers might face a rush of pent-up demand once the initial panic is over. Meanwhile, as Reuters analyst Clyde Russell points out, Chinese demand for imports could stay steady even if consumers use less, as Beijing may take advantage of cheaper prices to replenish its strategic supplies.

Riyadh will also be wary of other sellers muscling in. Chinese refineries are configured for the heavier grade of crude Saudi Arabia produces. But last month’s trade truce obliges China to buy $52 billion of U.S. oil, liquefied natural gas and coal over the next two years, way more than it has acquired before. The price slump has only increased the required volumes. Saudi may still be swing producer, but China’s consumption heft may only get harder to manage.


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