Why the coronavirus is clobbering oil prices
Published Tuesday, February 4, 2020 9:48AM EST
Crude oil has crashed into yet another bear market on fears that the coronavirus outbreak will destroy demand in China, the world's largest crude importer.
U.S. oil tumbled another 2.8% on Monday and briefly broke below $50 a barrel for the first time since January 2019. Crude finished at $50.11 a barrel, leaving it down nearly 21% from the recent closing high of $63.27 a barrel on January 6. A bear market is frequently defined as a drop of more than 20% from previous highs.
Energy markets have been clobbered by the rapid spread of the coronavirus, which has killed more than 360 people and infected more than 17,000 around the world. The virus has also caused countless flight cancellations and brought parts of the Chinese economy to a standstill.
"There's a lot of fear in the market. And a lot of forced liquidations," said Ryan Fitzmaurice, energy strategist at Rabobank.
Oil prices had been on the rise to start the year as investors bet the U.S.-China Phase One trade deal would revive the global economy. Crude also momentarily spiked on surging tensions between the United States and Iran.
'THINGS REALLY SNOWBALLED'
The energy selloff began after U.S.-Iran tensions eased, lowering the chances of a supply disruption in the Middle East. But oil prices, along with the stock market, have since been rattled by the coronavirus outbreak.
"This virus showed up and that's when things really snowballed," said Fitzmaurice.
Investors are worried that the coronavirus will hurt demand for jet fuel. Major international airlines including Air Canada, American Airlines, Delta and British Airways have suspended all flights to and from mainland China until the end of February or longer. China Eastern on Monday became the first major Chinese carrier to suspend flights to and from the United States.
The coronavirus has alarmed investors because it's spreading rapidly in China, the most important source of demand for energy in the world. China relies on heavy amounts of oil to keep its fast-growing economy humming and to move its enormous population.
China imported more than 10 million barrels of oil per day in 2019, making it the world's biggest importer. It was the 17th straight year of record oil imports, according to Reuters.
"The question is how quickly will the virus get contained, allowing economic activity to resume?" said Ben Cook, portfolio manager at BP Capital Fund.
DEMAND DROPPING SHARLPY
In a worst-case scenario, oil demand is expected to plunge by 2.6 million barrels per day in February and 2 million barrels in March, according to Platts Analytics. Even the best-case scenario by Platts calls for a drop of 900,000 barrels in oil demand for February.
The notoriously boom-to-bust oil market is no stranger to bear markets. Yet even by oil's standards, these downdrafts are occurring more frequently. Crude has now plunged into four bear markets just since the start of 2017. That has helped lead to a dreadful performance for energy stocks.
Yet unlike these prior plunges, this bear market is being driven by diminished demand, not excess supply.
History shows it can take the energy market time to rebound from health shocks.
It took U.S. oil prices more than 10 months to recover in 2003 from the SARS crisis, according to CFRA Research.