‘The House is on Fire!’, so said the Saudi oil minister Prince Abdulaziz bin Salman when asked about the impact of the coronavirus on oil. Bloomberg — quoting people who had heard the comments but wanted to stay anonymous as the event was closed to the press —said the prince equated the current scenario with a burning house.

You can either treat it with a garden hose and risk losing the building or call the fire brigade, Prince MBS reportedly said at the closed-door session. Some would say that calling the fire brigade projects panic and it could damage the furniture but doing so would simply be acting responsibly, and you would save the house, the sources quoted the Saudi royal as adding.

Interestingly, this is in sharp contrast to what the prince had said at the outbreak of the virus. The epidemic would carry “very little impact on oil demand”, the prince had said then.

The issue is now getting serious by the day, none can deny.

Crude markets are faced with demand destruction. Prices are getting a battering and the impact is not expected to dissipate, anytime soon. With each passing day, it is becoming obvious that the outbreak is going to carry long term effects on the oil markets, especially since some oil producers are not ready to cut output further at the moment, as Saudi Arabia has been advocating in recent weeks.

For the last couple of weeks, Riyadh has been pushing for an emergency meeting of the Organisation of the Petroleum Exporting Countries (Opec) and its allies, especially top producer Russia, so as to further deepen production cuts. Moscow has so far been cool to the Saudi suggestion of a swift response to the virus, despite the Opec+ technical committee recommendation for an additional collective cutback of 600,000 barrels per day — on top of the 2.1 million already being enforced.

Gloom is setting in. Riyadh has apparently failed to convince Moscow for an emergency Opec+ meeting to discuss additional output cuts. In all likelihood, the Opec+ meeting would now take place in March only, as was originally scheduled. So in all probability no counteraction for now.

The toll on oil consumption from the epidemic has been severe. Chinese refineries are throttling back to cope with weak demand, processing 25 per cent less oil than the last year. Unofficial Chinese government sources are now conceding that their crude demand is down by about 20pc or 3m barrels per day (bpd).

In the meantime, the overall economic outlook continues to worsen. Analysts are trimming the growth forecasts for China’s 2020 gross domestic product (GDP) to as low as 4.9pc. There are now growing concerns that this sharp decline in Chinese GDP growth, from the estimated 6.1pc in 2019, could trigger a major global slump.

For these reasons, the International Energy Agency (IEA) has again cut its 2020 demand growth forecast for crude, shaving 378,000 bpd off its earlier estimate. The decline this quarter would be the first in more than a decade.

The world’s third-largest economy, Japan, has also entered a recessionary phase. Japan’s exports in January were down for the 14th straight month, as capital spending tumbled. Earlier reports showed that Japan’s economy contracted in the last quarter by the most since 2014.

There are indications now that the fourth-largest global economy, Germany, is also teetering on the brink. A sharp decline in China’s economy would cause the demand for products and services from Japan and Germany to plunge further, causing their economic malaise to deepen. That would further impact the global crude demand, pushing the prices even lower.

Media reports are speculating now that Brent could fall to as low as $50 per barrel. Goldman Sachs Group Inc. has now slashed its 2020 crude-demand forecast, lowering its first-quarter price estimate by 16pc, down by $10 to $53 per barrel. That would cause the North American benchmark West Texas Intermediate (WTI) to fall to around $48 per barrel or even lower, as it trades at a discount to Brent.

The commodity strategist of investment bank Damien Courvalin now believes a sudden downturn in demand from Chinese consumers, coupled with a lack of clarity on production cuts from major oil-producing nations, could lead to a build-up of 18m barrels of crude oil in inventory, four times the team’s initial estimate. The hangover would persist, it is now getting evident.

While lower crude oil prices may help crude consumers like Pakistan in the shorter run, a shrinking global market would also hamper the prospects of economic growth of the country, one can’t escape underlining here.

Published in Dawn, February 23rd, 2020