Price Impacts of the Coronavirus on Global Fuel Markets | Advisor Pulse
February 18, 2020
The start of 2020 reintroduced significant price volatility across fuel markets in various geographies. The coronavirus is responsible for the majority of this price turbulence, bringing significant downside pressure to crude oil and diesel prices in recent weeks.
Current State of the Coronavirus
The coronavirus originated in China – the world’s largest oil importer and second-largest economy – and has gradually spread internationally. Most concerns about its effect on public health still reside in Asia where the virus originated. Travel within, to, and from China has stopped to limit the scope of the virus’s expansion which has interrupted economic activity. Many regions throughout the country have additionally been shut down by the government. This paints a bleak picture for the nation’s economy and, therefore, oil demand for one of the world’s most polarizing markets.
As of February 16, reports indicate over 71,000 confirmed coronavirus cases globally, with 99 percent of those residing in China. This number has grown rapidly, but mixed reports say the virus’s infection rate may be at, or near, its plateau. The energy market will face a bearish outlook until China can sustainably resume its social and economic activity.
How Do Infectious Diseases Impact Energy Prices?
Widespread viruses typically bring downside price pressure for energy commodities due to the strong relationship between economic activity and demand for crude oil and refined products. This is especially true when the sphere of influence involves an economy the size of China’s. News headlines have compared the coronavirus outbreak to China’s Severe Acute Respiratory Syndrome (SARS) pandemic from the early 2000’s, but it is difficult to draw a direct comparison between the two.
Since SARS occurred in 2003, China’s demand for crude oil has grown nearly 150 percent by the end of 2019 and now accounts for nearly 15 percent of the world’s total. The country’s GDP also grew from 4 to 16 percent of the global economy in that same timeframe. For added context, the current coronavirus outbreak and its coinciding effect on the Chinese economy is expected to lower the world’s GDP growth by 0.3 percent this year. This reinforces China’s growing significance in the global economy, hence why the health of oil demand is currently at risk and prices have tumbled.
What’s at stake in the energy market?
The market softness brought on by the coronavirus has encouraged the International Energy Agency (IEA) and the Organization of Petroleum Exporting Countries (OPEC) to notably revise their oil demand projections downward in their latest reports. Whether demand will dip in alignment with these forecasts will depend on the success of quarantine efforts. But for now, it appears the market will be oversupplied.
One thing that could derail a portion of this bearish sentiment is the production strategy of OPEC and its allies. The group called an emergency meeting in early February to set a course for the rest of 2020 based on the coronavirus’s market impact. The cartel failed to reach an agreement despite being motivated to institute more aggressive production cuts. It remains unclear if their current strategy will change prior to their next meeting.
Scroll below to see how the coronavirus outbreak is impacting the following markets across the globe:
Global Marine Shipping
United States Fuel Markets
Mexican Fuel Markets
European Fuel Markets
With Breakthrough Fuel Management solutions, carriers are made whole on fuel costs regardless of changes in the market. For clients seeking a more in-depth look at how the coronavirus is impacting their network, contact your Client Account Manager, or contact us.
Impact of Coronavirus on Marine Fuel Markets
Global bunker fuel prices accelerated in December leading up to the highly anticipated IMO 2020 regulatory shift on January 1. Since then, fuel prices for international maritime transport – specifically LSMFO and VLSFO – have fallen about $150 and $180 per metric ton, respectively, as a result of the coronavirus outbreak. It is important to note that IFO380 deviated from this downward trend because it is phasing out of the market in response to the new IMO 2020 sulfur regulations. Compliant fuels are available to support the movement of the maritime industry’s containerized freight, but the virus has drastically disrupted China’s ocean import and export volumes, therefore lessening the need for marine bunker fuels.
Impact of Coronavirus on U.S. Fuel Markets
Since the coronavirus’ market influence accelerated, oil lost over 20 percent of its value and briefly entered a bear market. Similarly, wholesale diesel prices – which remain heavily connected to oil market behavior – also declined over 30 cents per gallon from early-January highs.
Some media outlets are reporting that the spread of the coronavirus may be slowing. This shift in sentiment has helped oil and diesel prices stabilize in recent days but it will be a waiting game to see just how long oil and economic demand will be impacted to the point that it translates to energy price volatility.
Impact of Coronavirus on Mexican Fuel Markets
Diesel prices in Mexico have also shown a profound connection to the coronavirus’s oil price impact. The country’s national excise tax allows the government to smooth significant price volatility. However, due to the energy market’s recent downward slide, the government has maxed-out this tax to absorb a portion of the downside behavior. Regardless, national average retail less VAT diesel prices have still fallen over 2 percent since early January and have retained their connection to the broader energy market. This will likely continue if the tax remains maximized and commodity prices dip.
Impact of Coronavirus on European Fuel Markets
European retail less VAT diesel prices remained relatively unaffected by the coronavirus in the beginning of 2020. However, by mid-January through the first week of February, an average 3 percent downward price shift throughout the European Union suggests prices could continue falling, especially at the retail level. European retail prices remain heavily influenced by ARA diesel commodity prices as this is the base input used in the retail diesel price buildup. The longevity of this decline will depend on whether Brent crude oil and ARA diesel prices can rebound in the near term.
Coronavirus Fuel Market Impact Moving Forward
The strong relationship between economic health and demand for crude oil and refined products has been exposed due to the virus’s concentration in China. Diesel prices in various geographies across different markets will stay heavily influenced by coronavirus developments. Bearish price behavior is likely to continue until more positive news of containment arises, or actions are taken to offset softened demand.