Jan 28, 2020

Oil markets may be overly spooked by coronavirus' energy impact

Two pedestrians in Jiangtan Park on Jan. 27 during the lockdown in Wuhan, China. Photo: Getty Images

Some analysts are beginning to wonder if oil markets are overly spooked by the potential for the coronavirus to dent energy demand as travel and economic activity are crimped.

Why it matters: The human health toll is what matters most, with at least 107 people dead so far. But the coronavirus is also rattling markets, and is arriving when the oil market was already awash in supplies and demand growth was modest.

  • China, where the outbreak is centered, is the world's largest oil importer and flights in the region are a massive source of jet fuel consumption.

What they're saying: "Several questions remain unanswered about the potential fallout from the coronavirus, but if the experience from the 2003 SARS outbreak is any indication, demand worries are likely overdone," Barclays said in a note.

  • RBC Capital Markets said in a report: "We believe coronavirus is a Chinese jet fuel demand story for now and not yet a global demand story."
  • Their report, while noting the outbreak is still unfolding, says that right now the price decline is "overextended" compared to supply and demand fundamentals.

What's next: Who knows? "[C]alling the bottom of a market with any degree of conviction during periods of epidemics is exceedingly difficult," RBC notes, citing fear in the marketplace.

Where it stands: OPEC "wants to extend current oil output cuts until at least June, with the possibility of deeper reductions on the table if oil demand in China is significantly impacted by the spread of a new coronavirus," Reuters reports this morning.

  • Brent crude is hanging around in the $58 per barrel range this morning, with this week reporting the lowest in over three months despite conflict in Libya that's cutting output.

By the numbers: Barclays' note sees global crude oil demand loss related to the virus at around 600,000 to 800,000 barrels per day in Q1 and around 200,000 for the full year, which they note is less than 0.2% of global demand.

  • They also see OPEC and allied producers stepping in with more supply cuts if demand loss is more severe.

Go deeper:

Go deeper

Crude oil prices fall to 3-month low over coronavirus fears

Pedestrians wearing face masks cross a road in Hong Kong on Jan. 27. Photo: Anthony Wallace/AFP via Getty Images

Crude oil prices fell to their lowest levels in over three months Monday as traders weigh how much the spread of the coronavirus will eat into demand because travel and economic activity is curtailed.

Why it matters: The sharp drop, which follows declines last week, shows how the spreading virus is rippling through global markets.

Go deeperArrowJan 27, 2020

OPEC considers production cuts as coronavirus impacts China's oil demand

Photo: Ryad Kramdi/AFP via Getty Images

OPEC's possible responses to the spreading coronavirus that's hurting oil demand and prices are starting to come into view.

Why it matters: Besides killing more than 360 people so far, the outbreak is severely curtailing airline and economic activity in China, the world's largest oil importer and second-largest oil consumer.

Coronavirus throws oil demand into reverse for first time in a decade

The International Energy Agency's monthly market analysis released Thursday says global oil demand will fall by 435,000 barrels per day during this quarter compared to the same period a year ago.

Why it matters: It's the first quarterly contraction in over a decade.