Oil futures suffered a drop of almost 4% on Monday as the spread of COVID-19 outside China underlines worries about a potential hit to crude demand.
“For oil, the fear is we will see more demand destruction and turn a very tight global oil market into an oversupplied market,” said Phil Flynn, analyst at The Price Futures Group, in a note.
West Texas Intermediate crude for April delivery CLJ20, -3.82%, the U.S. benchmark, fell $1.95, or nearly 3.7%, to settle at $51.43 a barrel on the New York Mercantile Exchange. That was the lowest front-month contract settlement since Feb. 13, according to Dow Jones Market Data.
April Brent crude BRNJ20, -0.21%, the global benchmark, lost $2.20, or 3.8%, to end at $56.30 a barrel on ICE Futures Europe, for the lowest finish since Feb. 12.
The drop for oil accompanied a selloff in global equities and other assets perceived as risky, triggered by a rise in the number of COVID-19 cases outside of China. The spread of disease caused by a coronavirus that emerged near Wuhan, China, late last year has sparked fears of a hit to supply chains and global economic activity. The Dow Jones Industrial Average was down more than 800 points, or 3%, as oil futures settled.
“While Chinese authorities have reported increasing activity across many key industries, we now may have to turn our attention more and more to the rest of the world and start formulating some new demand ideas there as well,” wrote analysts at JBC Energy, a Vienna-based consulting firm, in a Monday note.
See: South Korea goes on high alert over virus, Italy battles to contain outbreak
Some analysts argued that a knee-jerk reaction to headlines surrounding the viral outbreak was overdone.
Also read: World Health Organization says COVID-19 is not a pandemic
“The oil market is pricing in the risk of a global slowdown as the virus spreads. We can give historical contexts to these types of events and, in the big picture, demand shocks should be bought not sold, yet try telling the market that,” Flynn said.
‘The coronavirus impact does not justify a 20% price reduction.’
Jay Park, chief executive officer of junior oil-and-gas company ReconAfrica RECO, -2.70% said some experts are saying 1 million to 3 million barrels a day are being affected by a demand crunch.
But “that’s only 1% of production. That shouldn’t translate to a $13 drop in prices,” Park said in emailed commentary. “The demand for oil and gas is inelastic, so price changes are always more severe than demand. If demand goes down a little, the price goes down a lot.”
Still, “the coronavirus impact does not justify a 20% price reduction,” he said. “Fear is driving the market.”
The moves for oil come ahead of the March 5 to March 6 meeting in Vienna of the Organization of the Petroleum Exporting Countries and their allies, collectively known as OPEC+.
There have been reports of a potential break in Saudi Arabia’s alliance with non-OPEC Russia, but Saudi Energy Minister Prince Abdulaziz bin Salman told Reuters on Friday said the media reports were “absurd and utter nonsense.”
Read: What a breakdown in the Saudi Arabia-Russia oil alliance would mean to the market
In other energy trading, March gasoline RBH20, -2.85% fell 2.5% to $1.6091 a gallon, while March heating oil HOH20, -4.57% declined by nearly 4.4% at $1.6132 a gallon.
March natural gas NGH20, -3.57% lost 4.1% to $1.827 per million British thermal units.
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February 25, 2020 at 03:05AM
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Oil drops nearly 4% as viral outbreak stokes worries about crude demand - MarketWatch
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