While it may initially have been covered as a Chinese outbreak, the implications of the Coronavirus epidemic have far surpassed its geographic ground zero, and ramifications that once appeared limited to the Chinese economy, health, tourism, and industrial sectors, are now beginning to be felt across the Gulf region. In fact, nearly each of the Gulf states has now reported diagnosed cases of Coronavirus within their borders. The virus’ proliferation has had, and may continue to have, implications on the world economy, especially as it now impacts the world’s largest oil-exporting region. This has led to further effects on the economic, energy, and health sectors in the Gulf. Still, while each of the Gulf states is experiencing anxiety regarding the outbreak, responding to its spreading remains a larger challenge for some Gulf states, than others.
The simple fact that the outbreak began in the world’s second-largest economy, China, predicts negative impacts on oil prices and global stock markets. After reports of an increase in coronavirus cases outside of China, the stock market witnessed its largest drop in nearly two years. On February 24, 2020, the Dow Jones lost 3.5% of its value, while the Nasdaq closed 3.7% lower than its opening. A similar pattern was also experienced by Gulf exchanges, with markets in Kuwait, Saudi Arabia, and Qatar also negatively responding to the virus’s impact on global markets and regional trade with Asia.
China’s status as the largest importer of the Gulf region’s oil predisposed that the outbreak’s impact on industrial operations and the subsequent drop in oil price and demand would rattle the Gulf. China’s oil market is arguably one of the most important markets for oil producers. Therefore, any drop in oil exports to Chinese refineries will significantly impact revenues for nearly all Gulf states. In 2019 alone China’s imports of oil rose by 9.5%, and Chinese demands are only expected to grow in 2020. Therefore, given that more than half of China’s oil needs come from OPEC, the outbreak has impacted the Gulf region in particular. In 2018, six Gulf states (Saudi Arabia, Iran, Oman, Iran Kuwait, and the UAE) were among the top 10 providers of China’s oil demands, a representation that has increased in 2019 and is expected to grow in 2020.
The collapse of Chinese oil requirements came at a time when demands were already low. These factors motivated OPEC members to consult with China in order to forecast the longer-term effects of coronavirus’ proliferation on the demands of both China, as well as the global market. The aim of this dialogue was primarily to predict scenarios that may take place between now and the scheduled OPEC+ meeting in the first week of March. As a result of these conversations and in order to prevent an additional price drop, OPEC+’s technical committee recommended a further 600,000 bpd cut.
By February 10, 2020, (exactly one month after the virus’ outbreak) oil demand and price had dropped to their lowest levels in 13 months. Brent hit $53, and U.S. West Texas Intermediate fell to $49.57 per barrel. The price spread between January 20 and February 10 reached $11. Additionally, on February 21, the same-day price difference stood at $4, when the opening price of $55 grew to $59 by days end. These atypical fluctuations speak to the effects of uncertainty regarding Asian oil demand as the number of reported cases across the continent grows.
Now that the outbreak reached its second week, several Chinese refineries have halted operations, and by association, their imports. Within these two weeks, Chinese refineries had cut their incoming shipments by nearly 1.5 million barrels per day. In turn, this decrease was the primary factor causing a reflexive drop in oil price and led to talk of coordinated OPEC+ efforts to stabilize the freefall. Two weeks later, the price recovered 10%, exceeding $58, a result of OPEC+’s initial agreement to increase output cuts. It is notable to stress that the drop in the Asian market’s demand has impacted the prices of both oil and Liquified Natural Gas.
Corona in the Gulf Region:
As of writing, there have been confirmed coronavirus cases in each of the Gulf states except Yemen and Saudi Arabia. Iran itself has registered 245 cases, the highest in the Gulf region. Two of those confirmed diagnoses ironically includes the Deputy Health Minister, as well as the Vice President. Within Iran, the epidemic appears to have originated in Qom city and has led to 26 confirmed deaths, the highest count outside China. The virus’ proliferation within Iran has instilled fear among the neighboring GCC countries and Iraq, all of which have closed borders and halted flights to Iran amidst the outbreak. Bahrain, Oman, Kuwait, and Iraq have reported cases of coronavirus among individuals who had traveled to Iran in recent weeks. Of the 13 cases reported in the UAE, all of them were either Chinese expatriates or individuals who had recently returned from Iran. Qatar has reported one case of Middle East Respiratory Syndrome (MERS), a coronavirus-induced infection. The only Gulf states that have not yet reported coronavirus cases are Saudi Arabia and Yemen, both of which have taken measures to prevent the virus’ spread to their borders.
The implications of coronavirus on the public health and economies of the Gulf states have begun to make themselves known. The trade, transportation, tourism, and oil sectors will be the first victims should the outbreak continue to compound within the Gulf region. Bahrain and Kuwait have announced a closure of schools for two weeks to prevent the outbreak of the virus, while Iran has been encouraging citizens to remain indoors. These mitigating strategies will have different implications for the Gulf’s various economies, and will certainly increase pressure on the region’s healthcare sectors. Overall, containing the virus presents itself as the primary challenge for the Gulf states, particularly those facing unrest (such as Yemen and Iraq), as well as those facing an economic crunch due to sanctions (primarily Iran).
While the human toll of coronavirus on public health is certainly worrisome, it is important to show that the epidemic will have an impact for oil-producing nations that may never even register a single confirmed case of coronavirus. The global nature of oil-markets, as well as the centrality of Chinese and Asian consumption to the Gulf’s oil exports inextricably links the supply and demand relationship of these two regions. Therefore, while medical experts work to curtail the virus’ spread, OPEC+ planners should continue monitoring and bracing for the unexpected ways in which coronavirus has infected the Gulf region’s economics.
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