Oil Is Still Falling on Coronavirus Fears. China Is Buying. - Barron's

Fear of how the virus could affect the world economy, and demand, has sent oil prices lower.

Photograph by David McNew/Getty Images

The oil selloff gained steam on Friday, with West Texas Intermediate crude futures plunging more than 6% before recovering slightly. One gigantic market participant—China—appears to be taking advantage.

Near midday, futures on WTI were down 4.6% to $44.92. WTI hasn’t closed below $45 since 2018.

Brent crude futures also briefly fell below $50, to levels where Brent hasn’t closed since 2017. Brent is down more than 25% since the virus began making headlines in mid-January.

Oil stocks were holding up better. Exxon Mobil (ticker: XOM) traded down 0.2% to $49.75 after selling off more dramatically earlier in the week.

Oil has proven to be among the weakest assets in the coronavirus selloff. Traders entered 2020 already feeling pessimistic about oil, even before the outbreak made headlines, given expectations for continued supply growth and muted demand. The spread of the virus has intensified those fears, and led analysts to slash estimates for demand.

“A lack of buyers and cancellation of contracts has prompted many companies to park their crude on very large crude carriers near Singapore,” according to S&P Global Platts, which just reduced its estimate for global growth in demand in 2020 to 860,000 barrels a day from its previous estimate of 1.33 million barrels. That would be the slowest growth since 2011.

Things could still get worse. “If this epidemic were to turn into a global pandemic, with other large economies being affected in a similar way China has so far been, then the effects on global oil demand in the first half of 2020 could be close to catastrophic,” Platts Analytics said.

One buyer has emerged to soak up excess supply, according to RBC Capital Markets. China has been buying oil for storage, a dynamic that is keeping spot prices relatively strong.

“Preliminary satellite imaging of floating roof tanks indicate that China has increased crude stocks by some 28 million barrels so far this month,” wrote RBC’s Michael Tran. “China comprises over 80% of global stock builds this month and voluntary or not, the barrels have gone into storage and are unlikely to come out in the near term.”

Tran wonders whether weakness in the futures market will eventually hit spot prices, or if strength in the spot market will eventually convince futures traders to bid up prices.

“Given this paradox, either benchmark prices will rally or physical markets will soften, but the status quo is unlikely to hold,” he wrote. “The latter is more likely, in our opinion, but at face value, the firmer physical market suggest that crude demand does not appear as acutely dire as the refinery run cuts currently indicate.”

OPEC is planning to meet in Vienna next week to discuss whether to cut supply in an effort to boost prices. The threat of the virus even hangs over that meeting. “OPEC has said it is monitoring the health situation in Vienna after cases of the virus were reported,” Platts says.

Write to Avi Salzman at avi.salzman@barrons.com

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