As the COVID-19 pandemic sweeps the world, threatening human health and impacting the global economy, it has become the biggest "black swan" event in recent years. As the lifeblood of the national economy, the global and Chinese energy industry has inevitably been greatly affected. In response to the epidemic crisis, China has adopted the strictest control measures in the world. Since late January, factory shutdowns and traffic closures have severely affected China's industrial production and economic activities. As the world's largest energy producer and consumer, China's energy demand, supply and development prospects will have a great impact on the world. In addition, China is a global manufacturing power, playing a pivotal role in the global industrial chain, and the stagnation of energy supply and demand will also cause a chain reaction worldwide. As the global epidemic worsens, more and more countries have begun to vigorously implement containment policies, and even block borders and international travel, which will have a great impact on the global energy industry and the flow of commodities.     To this end, internationally renowned consulting institutions and think tanks are closely following the progress of the COVID-19 epidemic, and have made analysis and forecasts on the impact of the outbreak on the supply and demand of fossil energy in China and the world, the development of new energy industry and climate action. We will continue to push the core views of foreign think tank reports. Today, we publish a report by Oxford Institute of Energy Studies (OIES) analyzing the impact of COVID-19 on China's oil and gas industry.

OIES: The COVID-19 pandemic is not conducive to the medium-term growth of China's oil and gas industry

On February 7, the Oxford Institute of Energy Studies (OIES) released a report, "When China sneezes", which believes that the epidemic may lead to a decline in China's demand for oil and natural gas, resulting in a surplus of refinery exports and a significant decline in crude oil imports. It will also complicate China's commitment to US crude oil imports, and overall, it is not good for the medium-term growth of China's oil and gas industry. Specifically, the report includes:

First, the scale of China's response will have a significant impact on economic growth Hubei province accounts for nearly 5 percent of China's gross domestic product (GDP), while Wuhan, a city of 11 million people known as the "Chicago of China", is a large manufacturing base for traditional industries such as automobiles and high-tech industries, accounting for1.6 percent of China's economic output. The epidemic has left Hubei province the most severely restricted in terms of industrial activities and transport flows. At the same time, the extended Lunar New Year holiday has delayed the return to work of China's millions of migrant workers. In addition, restaurants and commercial centers are also likely to close or experience extremely low customer traffic. Reports suggest that traffic flows in most Chinese cities have fallen sharply. In early February, businesses in 24 provinces, autonomous regions and municipalities that account for more than 80 per cent of China's GDP were also restricted from returning to work. The scale of China's response to the outbreak will hit economic growth much harder than it did during SARS. Given China's role in the global economy, there will be ripple effects around the world. But if the Chinese government's aggressive control measures are effective in the next two to three weeks, the negative impact will be overwhelmingly contained in the first quarter of 2020. Assuming the outbreak peaks in mid-February and is brought under control in March, so that economic activity returns to normal in April, it will still lead to weakness in the coming month.

Second,Oil demand in the first quarter of 2020 will shrink by at least 500,000 BPD year-on-year The first sectors to be affected by the outbreak in China were tourism and services, which weighed on demand for petrol and flights, but the energy sector will be next, especially oil production, as manufacturers close factories. According to more modest estimates, Chinese oil demand will fall by 1m barrels a day in February, and demand in the first quarter is likely to remain flat from a year ago (about 12.7m b/d) and about 300,000 b/d lower than the average for the whole of last year (13m b/d). But if the average 70% drop in total passenger activity and 50% drop in freight activity are taken into account, the demand impact on February could be as high as 3-4 million BPD, more than a quarter of December's demand level of 13.5 million BPD, and could extend into March, Would reduce oil demand by at least500,000 b/d in the first quarter compared with the same period last year. With an economic recovery starting at the end of the second quarter, Chinese oil demand is still likely to increase by about 200,000-300,000 BPD in 2020, but less than the 550,000 BPD increase in 2019. While this is the current base case, the risk of a negative impact is certainly to the downside, so China's 2020 oil demand growth may only be 100,000 BPD.

Third, gas demand is expected to fall by 10-12 BCM in February-March.

The economic shock will also weigh on gas demand. Although the Lunar New Year is a slow season for industrial demand, weakness in industry in February and part of March could reduce gas demand by 10-12 billion cubic meters as gas is increasingly used for freight transportation. A subsequent rebound in economic activity could offset this weakness,ultimately leaving demand growth still strong in 2020. For now, China's gas market is well supplied, with reports of buyers notifying suppliers of delays and imposing force majeure demands on liquefied natural gas (LNG) highlighting the growing strain on ports, as well as logistical challenges. However, the resort to force majeure could presage the renegotiation of a series of contracts, given the huge losses suffered by major companies last year and the fall in spot prices of the Platts Japan-Korea Benchmark Index (JKM). Truck volumes at the terminals have fallen, and while lower LNG prices may spur buying by some private importers,volumes are likely to remain limited. Gas supplies may be enough to meet the slowdown in demand as domestic production recovers and warmer weather reduces heating demand,putting pressure on rising LNG demand in China.

Weaker-than-expected growth in demand for refined products, combined with ample product inventories, has led China's refiners to cut their capacity levels. The operating rate of refineries in Shandong province has reportedly fallen from nearly 70 percent in December2019 to less than 50 percent in February 2020. Transport controls and a shortage of truck drivers have limited product sales, and many refineries closed for the Lunar New Year have failed to resume operations, while other independent refiners have been discounting sales to reduce inventories. As a result, the cuts by independent refiners alone will reduce output by700,000-800,000 BPD. In addition, Sinopec also initially cut its output by 600,000 BPD, and the reduction could be even bigger. Petrochina is considering a cut of about 20 per cent, and Cnooc and Sinochem are also likely to cut production. As a result, the cuts will rise to 1.5-2million BPD in February, depending on domestic price movements, and may also be extended into March, assuming costs don't spike due to localised shortages. This could lead to higher exports of commodities in the energy sector in the coming months, particularly gasoline and jet kerosene, whose demand could be hit the hardest. Diesel demand is likely to be less affected given that it is dominated by road transport rather than industry. Unlike in 2003,when China was in the middle of resource-intensive industrialization, diesel demand for road transport has been decreasing since 2019. Government support for infrastructure projects and an increase in freight demand due to e-commerce are expected to offset some of the declining demand later in 2020.

Fifth, China's crude oil demand falls, and promises made in the US-China trade deal may be difficult to deliver.

China's demand for crude oil may also fall. Shippers are likely to shun Chinese ports due to fears of contagion, while a weaker yuan will put further pressure on imports. In addition, the short-term overhang of crude oil and product inventories has been exacerbated by the timing of the outbreak. Therefore, given the reduced demand for crude oil, Chinese buyers are unlikely to return to the market before April, assuming the outbreak is contained. Some speculative buying in response to low crude prices may occur, but this is likely to be limited given the extreme uncertainty about the demand outlook. For cash-strapped independent refiners, the outbreak could be an opportunity to declare force majeure on cargoes and avoid trading agreed crude.

The drop in crude imports also means that China will struggle to meet its commitments to buy US crude (and other commodities) as part of a "phase one" deal. Some Chinese buyers have reportedly asked sellers to delay or cancel deliveries, which has affected West African crude supplies. For their part, the national oil majors are likely to prioritize their term contracts,so Saudi crude supplies will remain the strongest.

Read from CAS Advanced Energy Technology Strategic Intelligence Research Center.