The coronavirus outbreak has already reached a global scale. It is affecting not only the social aspects of the global community such as people’s lives and health, but also the economic aspects – and this impact is quite tangible.
Why is the coronavirus affecting prices?
It is happening for three reasons:
- Companies both in China and beyond are working shorter hours or suspending operations altogether. Employees are staying home for various reasons. Production efficiency is in decline for both goods and services. Being one of the key links in the global value chain, China is falling out thus paralyzing multinational corporations;
- Due to the risk of transmitting COVID-19 through packaging, some goods are no longer exported from China and South Korea (whether the same happens to other countries depends on the geography of the epidemic and the progress in containing it or the lack thereof);
- Psychological expectations of business partners and customers force them to change their attitude towards brands and their country of origin.
Coronavirus impact on prices
Prices are soaring for some goods such as gold, the main investment tool during crises, as well as steel, electrical appliances, smartphones, car details in the lower price segment, and others. Some goods are getting cheaper, such as oil, end products from energy exporting countries, agricultural raw materials, first of all grain and legume crops, as well as copper, nickel and aluminum. This is happening because China’s demand for these products is dropping, while the supply remains at the same level, and the clearing price is getting lower.
Coronavirus and the oil market
On one hand, oil is used by producers of petroleum products and fuel, and by transport companies. On the other hand, it is also an investment tool with many derivatives that form a huge OTC market. China is a major exporter of oil: in 2018, 15.5% of total petroleum imports was made by China. All EU countries combined purchased 21.2%. In addition, China has the world’s second largest oil processing capacities: 16 mio barrels per day. The US takes first place with 19 mio barrels, and Russia takes third place with 6.5 mio barrels.
When the Chinese government shuts down plants and extends vacations in order to impose quarantine, it affects the oil market in the following areas:
- ports that receive oil tankers;
- oil refineries purchase less oil or stop purchasing it because their operations are suspended.
This results in bigger oil reserves in China and a necessity for redirecting transport flows by cargo shippers from other countries, which leads to deliveries becoming more costly and time-consuming – and not for customers but for oil exporters. China’s demand for oil plummeted by at least 25% due to plants closed for coronavirus quarantine. The number of trips and volume of deliveries have decreased manifold globally amid the pandemic, which has led to a reduction in the consumption of fuel, the main product of oil refining.
Oil prices plunged below $54 a barrel, hitting the year’s lowest level. The mechanism is simple: as the demand plummets and offer remains the same due to OPEC+ failing to agree on cuts in oil production, oil prices fall. The price for natural gas, the major substitute for oil, is plummeting as well as its exporters are making efforts to halt delivery contracts – which leads to a further drop in oil prices.
Fuel prices are going down together with oil prices. This means the countries that are mostly export energy resources, such as India, can reduce prices for their products to boost their competitiveness in the global market. Since January, the USA has seen its oilfields shutting down: the number of active drilling rigs in Texas alone has fallen to 398 from 556 in October 2019.
The coronavirus outbreak has become a black swan for the global oil market, an event that has negative effects and is highly difficult and even impossible to predict.
The oil prices plunge that occurred following the OPEC deal blowup is largely due to the fact that the market had already been stifled by the epidemic.
By Valeria Minchichova, Associated Professor, Department of World Economy and Finances, Financial University under the Government of the Russian Federation