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Forecasts from Our Coronavirus Study - Barış Sanlı & Gökberk Bilgin

This week we published a study on “A Virus to Kill Energy Demand: Coronavirus’ Impact” where we discussed how the virus effected the energy markets and what would happen in the future. The document is available in our website. Here we share the forecasts section.

One of the most important questions is “when the virus could peak?”. According to leading Chinese epidemiologist Zhong Nanshan, the virus may peak in the last half of February. [43] He also says, “I hope this outbreak or this event may be over in something like April.” The most important line from the interview is perhaps his assessment about the unknowns of the epidemic: “We don’t know why it’s so contagious, so that’s a big problem.” In terms of oil price forecasts, Oxford Economics has revised its number downwards by $6/b for the first half of 2020, but for the rest of the year, and they expect a normal trend.

The biggest short term question is how this epidemic will affect regional countries and Asian growth. Already there are signs of its impact on Japan, South Korea, Indonesia, and others. So the slowdown is contagious, just like the virus itself.

However, the story may not be that simple. The impact of the epidemic is complicated and not fully understood as of now. In the very general terms, we may summarize the impacts as follows:

- The world economy will slow for the Q12020 for sure, and 2020 growth will be most probably lower than expected,

- Import and export-oriented economies will be impacted differently. South Korea and Japan’s economic growth will be hit, but countries like Turkey may see an increase in economic growth.

- Oil, jet fuel, gasoline, and diesel demand will be down for Q12020 and most probably H12020. This fully depends on when the epidemic will peak. However, the airline industry problems should be watched carefully.

- Passenger car sales are down 20% year-on-year in China. This will impact the whole supply chain in automotive production. German auto manufacturers are quite active in the Chinese market, and the slowdown may reduce the earnings and sales of German carmakers.

- Transportation bottlenecks and logistic problems are a major part of the problem that is not easy to quantify, but Chinese import and exports as well as retail sales will be lower.

- Coal prices have been quite different than other commodity prices, since China closed its mines due to work restrictions and increased imports. The prices between China and Europe diverged and Chinese coal prices have risen. For the rest of the year, coal stocks will be impacted and coal may remain higher than expected if economic activity rebounds.

- LNG oversupply will persist. Prices may not rebound until Q3.

- Solar panel manufacturers will have difficulty for the first half of 2020, and this will be reflected in the prices. The important question is whether regional targets in China will be revised downward or not. If not, solar costs will increase.

- The wind manufacturers’ position is mixed. Their Chinese operations and sales will disrupt their balance sheets and deliveries.

- Electric cars may not be having a good year. As Chinese producers face tough times, the slump in the automotive market will impact everyone.

As the last point, I believe there is one final graph to be considered, and that is wholesale food prices. Wholesale food prices are important because unemployment and high food prices do not mix well. The Chinese epidemic is already increasing wholesale food prices. This will have an effect on middle-class budgets.

The lower Chinese economic activity may mean lower energy and commodity prices for the global economy. This may increase economic activity in other countries. But US elections and US oil&gas producers are important. The further slipping of oil prices may have negative effects.

In summary, the evidence so far shows us that this epidemic is much bigger than the previous ones. The impacts are not limited to fossil fuel industry like 2003 but also impacting the on going energy transition. Interestingly enough, while oil and gas prices drop, coal and solar panel prices may go up. Still we need to see the peaking of virus to make better assessments.


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