SARS Provides a Faulty Road Map for Oil Prices - The Wall Street Journal

Oil-price moves after the SARS outbreak in 2003 may not be a good template for... — Oil-price moves after the SARS outbreak in 2003 may not be a good template for the market’s reaction to the recent coronavirus in China. Here, medical workers in Hong Kong in 2004. Photo: TED ALJIBE/AFP via Getty Images

Spencer Jakab

The Wall Street Journal

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Jan. 27, 2020 1:40 pm ET

All the stars were lining up for a recovery in oil prices, except for the one with the greatest gravitational pull: China.

Tension with Iran didn’t take any supply off the market, but violence in Libya has. Meanwhile, the Organization of the Petroleum Exporting Countries and its allies seems likely to extend recently-agreed-upon production cuts through the end of 2020. And, last but not least, a sharp drop in U.S. drilling activity throughout the latter part of 2019 is likely to slow output from the shale patch.

But the coronavirus outbreak in China has overwhelmed all of those bullish factors. U.S. benchmark crude dropped from over $63 a barrel three weeks ago to less than $53 on Monday.

A natural template for gauging the impact on the oil market is an earlier, China-centered epidemic: SARS, or severe acute respiratory syndrome, which peaked in early 2003. But there are two reasons that comparison is of little use.

One is that China today consumes about 13.5 million barrels of crude oil daily, or nearly 10 million more than it produces, according to data from BP’s Statistical Review of World Energy. Its import needs were just one-fourth as high in 2003.

The U.S. economy, meanwhile, benefits less from cheaper oil, at least from a balance of payments perspective. Oil imports in 2003 were over 13 million barrels a day, while today, the U.S. has become a small net exporter of petroleum products.

Another confounding factor is that, at around the same time SARS was peaking in March and April 2003, the U.S. was launching the invasion of Iraq. Oil prices reached over $35 a barrel the day before a speech by President George W. Bush outlining an ultimatum. They fell below $27 a week later once hostilities were under way and the battle was going smoothly.

Even if the current virus were to follow a milder course than SARS, the impact on the oil market could be harsher.