Novel coronavirus highlights OPEC reliance on Chinese oil demand

Oil prices have plunged around 15 per cent this year, hit by concerns about demand from major consumer China. (Photo: AFP/Frederic J Brown)

"China has become increasingly important for OPEC countries in recent years," research group JBC Energy told AFP.

In total, more than two-thirds of China's crude imports comes from the Organization of Petroleum Exporting Countries and Russia.

Following a slump in prices, OPEC and its key oil-producing ally Russia have been meeting this week to discuss the situation.

In an apparent sign of the difficulties involved, OPEC delegates meeting in Vienna announced that the talks would continue on Thursday (Feb 6).

However, it is not a formal meeting on output, as was the case in December when OPEC and its OPEC+ allies extended an existing agreement to curb crude production to prop up prices.

OPEC kingpin Saudi Arabia and Russia are the biggest foreign suppliers of crude to China.

But as a whole, OPEC would be seriously affected by a slump in Chinese oil demand.

Despite oil prices rebounding strongly on Wednesday, they have fallen heavily overall during the past couple of weeks on fears of a China-fuelled global economic slowdown.

The price falls have raised eyebrows at OPEC, whose 13 member nations pump out around one-third of global crude and are anxious to safeguard revenues, faced with weaker Chinese demand.

"SELLING PRESSURE"

"China is the world's second largest oil-consuming country, contributing 13 per cent of global oil demand," said Yujiao Lei, analyst at commodities research group Wood Mackenzie.

"As a fast growing economy, more than one third of global oil demand growth comes from China.

"Without sufficient domestic supply, China's oil dependency keeps rising, which makes China one of the most important markets for OPEC," Lei added.

Saudi Arabia said this week that the impact of the virus on oil demand was "extremely limited" and "driven by psychological factors".

Nevertheless, and according to JBC Energy, "OPEC/OPEC+ only really have one option, and that is to announce further supply cuts, otherwise the ... price (of oil) is likely to fall further" in the absence of a major development on containing the virus.

Awaiting a possible reduction in OPEC production, Bloomberg has reported an increased interest in demand for oil tankers to store crude caused by a drop in refinery activity.

Oil prices are down around 15 per cent since the start of the year after benchmark contracts Brent North Sea and WTI dropped under US$55 and US$50 respectively for a barrel this week - the lowest levels in 13 months.

"Oil prices have been under tremendous selling pressure since the breakout of coronavirus as investors are concerned about oil demand," Avatrade analyst Naeem Aslam said on Wednesday.

"It is widely anticipated that the Chinese oil import, which was sitting at nearly 11 mbpd (million barrels per day) at the start of this month, is going to see significant weakness.

"We believe that this number has dropped to 7 mbpd."