Coronavirus Is Impacting Energy Prices | Dyball Associates

As the number of people infected has risen dramatically in the UK this week the number of infections globally continues to rise. The spread of the virus has caused enough concern to prompt the Department of Health to describe it as a ‘serious and imminent threat’ to the nation’s public health.

Whilst the number of infections in the UK remains relatively low in comparison to places like Italy and Iran, the news has raised concerns that more is yet to come.

The global impact of the virus is on the rise as Chinese manufacturing has been dramatically reduced in recent weeks resulting in a sharp drop in the demand for oil and gas.

The World Health Organization (WHO) has also said that the number of cases outside China could be just “the tip of the iceberg”.

Iran, Italy, Japan , South Korea have all seen a spike in cases bringing the number of known infected to above 110,000*.

Market observers are growing increasingly concerned that China’s demand for Liquefied natural gas (LNG) could collapse as the coronavirus continues to put pressure on its economy. This, in turn, could force LNG prices lower with the potential to impact The National Balancing Point, commonly referred to as the NBP, the virtual trading location for the sale and purchase and exchange of UK natural gas.

"We came into winter with high European storage levels, and then the market withdrew really low rates in November and December on the back of mild weather. So here we are at the start of February with stock levels we wouldn't normally expect to see. This over supplied position has been made worse by the global LNG market and the impact of the coronavirus in China. It's a shocker for sellers; we are heading into the second quarter with reduced demand for storage and there could be even more gas available than in 2019,” said Charlie Ward, head of renewables and PPAs at advisory and support services group, New Stream.

The Coronavirus is also putting pressure on oil prices as weakened demand from China adds to oversupply issues. Brent crude, for example, slipped to $54.23 a barrel on February 10th. Since January oil prices have declined by 20% putting further pressure on countries that depend on the commodity for much of their income.

“The question everyone is desperate to find the correct answer to is how damaging the epidemic is to the global economy and therefore to oil demand and how long it will last. “No-one knows but as of today the crisis has not been contained, it is spreading, and it has already claimed more lives than the SARS virus in 2003.” said oil broker PVM’s Tamas Varga.

As a result, the Organisation of the Petroleum Exporting Countries (OPEC) and its allies plan to cut oil production by a further 600,000 barrels per day to prevent prices tumbling further. Oil prices had briefly risen and experienced turbulence over the last few months due to rising tensions in the Middle East and continued high supply out of the USA.

The scale of the fall has shocked the energy industry with one oil analyst quoted as saying; "We have not seen a demand destruction event of this scale that moves this quickly."

*A price war that has broken out between Russia and OPEC has added to the pressure on oil prices.

With demand and prices falling we can expect to see those declines enter the wholesale pricing of gas, which in turn could result in domestic energy prices seeing something of a drop.

Ofgem’s recent lowering of the price cap by £17 will see millions of households seeing a drop in their energy bills but if wholesale prices continue to fall as a result of the virus, we could see pressure build to make further cuts over the coming months.

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