The Wuhan coronavirus is shuttering factories and stymieing economic activity in Asia as millions of people stay home either by choice or government order. Clearly the shutdown is most pervasive in China’s Hubei province, where the outbreak originated, and where tens of millions of people will remain at home while many of their fellow citizens return to work on Monday.

Yet in today’s highly interconnected economy, the fallout won’t restrict itself to Hubei, or even China. This is particularly true of energy markets; China is, of course, the largest energy consumer in the world in absolute terms, accounting for some 54% of Asia’s consumption (seven times that of Japan in 2018).

Put another way, when China coughs, global energy suppliers get sick – and early indications suggest that this could be a nasty bug indeed.

Analysis

There’s wide agreement that the outlook for natural gas and oil is negative in the wake of this ‘black swan’ event.

But the burning question is: How bad?

One estimate from Chinese energy executives interviewed by the Financial Times predicted a 25% drop in oil demand over the month of February, or 3.2 million barrels a day (bpd) compared to last year – the equivalent of 3% of global consumption.

China is the world’s top oil importer; in February 2019 it was consuming around 13 million bpd per month.

BP has also sounded the alarm, warning that the coronavirus could shave up to 40% off of demand growth over the course of the year. That would equate to some 300,000-500,000 bpd of lost consumption per day.

It’s worth noting that the 2020 outlook for oil markets wasn’t overly positive even before the Wuhan coronavirus emerged at the end of last year. Tepid demand through 2019, trade disruptions, climate worries, oversupply due to the US shale revolution, and divestment were all already pressuring global suppliers.