|January 30, 2020|
Coronavirus is slowing the global demand for oil
|The emergence of a deadly virus in China could dampen demand for oil for months to come as global health officials try to contain the growing outbreak. |
More than 50 million people in central China are on lockdown after the deaths of more than 100 people from a new strain of coronavirus. Trains, buses and airplanes sit idle in quarantine-blocked Wuhan, the central Chinese city of 11 million where the outbreak began last month. China, usually the world's biggest importer and second largest consumer of oil, is buying less crude than it otherwise would as fewer people travel within the massive country.
Coronavirus is also having a major impact on international travel: The United States and other countries are urging their citizens to avoid all nonessential travel to China. Concerns about the respiratory virus could result in a drop of demand of 260,000 barrels per day in 2020, Goldman Sachs wrote in a note last week, with consumption of aviation fuel hit the hardest.
"It's fear that's gripping the market," said Patrick De Haan, a petroleum analyst at GasBuddy. "This virus is most notably affecting demand in China."
Already, the international Brent benchmark for crude is down from $66 at the beginning of the month to around $59 on Wednesday.
Yet analysts say concerns about a massive spread of the virus --- and potentially slower global economic growth overall--- may depress energy prices even further.
"The threat of a pandemic is having a larger effect than the effects of the actual outbreak," said Sophie Udubasceanu, global oil editor at the market analysis firm ICIS. "The scale of the problem is still unknown."
Doctors have spotted the pneumonia-like illness in more than a dozen-and-a half countries, including Thailand, Taiwan, Japan, Singapore and the United States. Still, the vast majority of the more than 4,500 people infected so far live in China, where scientists say the virus was transmitted to humans at a live animal market in Wuhan.
China has been down this road before. During a 2003 epidemic of severe acute respiratory syndrome, or SARS, in China, energy demand took a similar downturn. The price of oil slumped from around $35 per barrel to under $25 per barrel, according to ICIS, in March of that year after the World Health Organization issued a global alert about the virus linked to that disease.
If the latest outbreak becomes a "SARS-style epidemic," JPMorgan said in a research note, it could trim $5 off the price per barrel.
Major oil-producing nations, including Saudi Arabia, are aiming to reassure the jittery market. Saudi Energy Minister Prince Abdulaziz bin Salman said in a statement that impact seen so far in oil and other commodity markets is "primarily driven by psychological factors and extremely negative expectations adopted by some market participants."
The Saudi kingdom and other nations in the Organization of Petroleum Exporting Countries will meet in March where they will debate whether to further cut petroleum production in response to the decreased demand.
Before then, U.S. drivers may see a further decrease at the price at the pump. In January, the national average for gasoline has already fallen by around 7 cents, to $2.50 per gallon on Wednesday.
The coronavirus outbreak, said De Haan, "will likely accelerate the downward movement of gas prices over the next week or two."