The global energy sector is sick because of the coronavirus. But the disease could have its most deleterious effect on the U.S. oil and gas industries, given that the president is trying to pressure China to buy more U.S-produced fossil fuels.
China’s concessions during trade talks are dubious. But the coronavirus makes them even more doubtful. And that hurts Donald Trump as much as it does domestic energy producers, especially in an election year.
When Trump announced he had reached an initial agreement with the Chinese under Phase One of the trade truce, he said that China would purchase an extra $200 billion worth of goods from this country, including oil and gas. That’s double the dollar amount of what it had purchased in 2017 — a hard feat given that China would then have to break existing deals with other nations and disrupt existing supply chains.
Think of it this way, says IHS Markit: When the SARS outbreak hit in 2002, China had the sixth biggest economy and it accounted for 4.2% of the global domestic product. Now, though, it is the second largest, making up more than 16% of the globe’s total output. As such, it imports 10.4% of the world’s goods. As a result, “both oil and gas prices are under severe pressure, with demand set to remain weak, while supply doesn’t seem flexible enough to quickly adjust.”
The report goes on to say that the price of West Texas intermediate crude oil is around $50 a barrel, which is a decline of 20% over the last month. While the trade war between the United States and China has limited this country’s exposure, China still buys American crude: 200,000 barrels of crude oil per day. Nevertheless, China’s demand helps determine international oil and gas prices. IHS concludes that global demand will drop by 4% in February, or 4 million barrels a day because of the coronavirus.
Specifically, Trump said that he persuaded China to buy $18.5 billion worth of energy fuels this year and $34 billion next year. But the coronavirus is causing China’s domestic economy to slow from its current rate of 6% a year. It’s not just that China is importing and consuming less oil and gas. It is also flying fewer planes and running fewer factories; the virus has inflected tens-of-thousands has killed at least 1,000 people.
The International Energy Agency frames it this way: in 2003, China imported 5.7 million barrels a day of oil. In 2019, that was 13.7 barrels a day, which is three-quarters of the global oil demand. Demand is now expected to contract for the first time in a decade by 435 barrels a day in the first quarter of this year and 825 barrels a day for the year.
“Lower oil prices, if sustained, are also bad news for highly responsive U.S. oil companies, but we are unlikely to see an impact on output growth until later in the year,” the International Energy Agency says. “The effect of the (coronavirus) crisis on the wider economy means that it will be difficult for consumers to feel the benefit of lower oil prices.”
Coupled with the existing glut, cheaper oil is hurting producers such as Exxon Mobil, Chevron and ConocoPhillips. They are reporting lower earnings as a result.
Natural gas markets are also shaken. Reuters is reporting that China’s largest importer of liquefied natural gas, China National Offshore Oil Corp. (CNOOC), has suspended contracts with at least three suppliers because of the coronavirus: the company, which operates nearly half of the terminals in China that receive LNG, is declaring “force majeure” — a legal move to suspend contractual obligations in the event of unexpected strikes and natural disasters.
At risk, the story says, are Royal Dutch Shell, France’s Total, Australia’s Woodside Petroleum and Qatargas. The bottom line is that the reduced demand cuts into already low prices, especially in the United States that has five export facilities. While China has largely forsaken U.S. LNG since May 2019 because of the trade dispute, the coronavirus is still reverberating here: witness the price decline.
“The coronavirus, I’m sure, will keep a lot of people on edge, and rightly so,” said Royal Dutch Shell Chief Executive Ben van Beurden on CNBC’s Squawk Box. “It is a very concerning development, a lot of people will be anxious, and of course we are monitoring very closely what is happening.”
The United States can’t escape the effects of the coronavirus given China’s muscle. Less economic global activity means less demand for oil and gas at home, making it impossible for China to fulfill its trade pledges. The long saga will thus extend into the presidential elections, hampering Trump as much as it does the U.S. energy sector.