Oil tumbled to the lowest in more than three months on fears China’s deadly coronavirus will hit demand in a market that already has plentiful supply.
Futures plunged more than three per cent as China reported an increase in fatalities and infections. While the country extended the Lunar New Year holiday to control the outbreak, more cases have been reported in other parts of the world. Goldman Sachs Group Inc. predicted that global oil demand may fall, but Saudi Arabia said it believes the crisis so far will have a “very limited impact” on consumption.
“The current impact on global markets, including oil and other commodities, is primarily driven by psychological factors and extremely negative expectations adopted by some market participants…”– Saudi Energy Minister Prince Abdulaziz bin Salman
The virus is the latest upheaval for the oil market, which has been struggling with demand concerns for months. Investors are selling crude and other commodities amid a broad withdrawal from riskier assets and fears the virus will curtail fuel consumption as travel is restricted.
“A supply glut of fuel in China would filter through to the rest of the world through exports and on that basis the market is reacting in this defensive manner,” said Ole Hansen, head of commodity strategy at Saxo Bank A/S. “The Saudis can try to stem the sell-off but while it’s being driven by the need to mitigate losses that will be difficult to control.”
Brent futures lost as much as 3.6 per cent to $58.50 a barrel on the London-based ICE Futures Europe exchange and traded at $58.95 as of 1:36pm local time. The contract slid 6.4 per cent last week, capping the longest run of weekly losses since June. West Texas Intermediate fell as much as 3.8 per cent to $52.13.
Hedge funds boosted bullish bets on WTI by 2.8 per cent in the week ended Jan. 21, the most in a month, a day before prices tipped into the worst three-day slump since September.
Saudi Energy Minister Prince Abdulaziz bin Salman said the world’s largest oil exporter was monitoring the virus’s impact both on the Chinese economy and the oil market. Yet, he said that the same “extreme pessimism” that’s afflicting the market also occurred in 2003 during the SARS outbreak, “though it did not cause a significant reduction in oil demand.”
“The current impact on global markets, including oil and other commodities, is primarily driven by psychological factors and extremely negative expectations adopted by some market participants despite its very limited impact on global oil demand,” the minister said in a statement.
Global oil demand may slip by 260,000 barrels a day this year and could shave almost $3 from the price of a barrel of crude, Goldman Sachs said last week, using the 2003 SARS epidemic as a guide.
China extended the Lunar New Year holiday by three days until Feb. 2, while companies in Shanghai have been asked not to start work until at least Feb. 9. The death toll in the country climbed to at least 80 so far with more than 2,700 confirmed cases of infection. Canada confirmed its first case while the US announced a fifth, as the virus spread to at least 15 countries and territories.