Oil's coronavirus plunge pricing in 'significant demand destruction'

Chinese demand is down 25-30%

Oil prices plunged Friday amid fears the fast-spreading coronavirus will continue to weigh on global demand.

West Texas Intermediate crude oil, the U.S. benchmark, fell by as much as 6.9 percent to $43.85 a barrel Friday, hitting its lowest level since December 2018.

Ticker Security Last Change Change %
USO UNITED STATES OIL FUND L.P. 43.18 -0.09 -0.21%

The drop ran the energy component’s weekly loss to nearly 18 percent and it has lost nearly 30 percent of its value this year.

The sharp selloff is “pricing in a significant amount of demand destruction for the next several months led by the events that have occurred in China,” Andrew Lipow, president of the Houston-based consulting firm Lipow Oil Associates, told FOX Business. “As we’ve seen the coronavirus spread throughout the world that has resulted in lower air traffic, cancellation of conventions and other travel industry-related functions, the quarantining of people in cities, which is all leading to a decline in oil demand.”

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The coronavirus, which originated in Wuhan, China, has caused hundreds of millions of people to be locked down in the country, resulting in U.S. airlines and others to cancel flights to and from China through late April. Airlines have also allowed customers to change reservations to hard-hit countries like Italy and South Korea, but have not canceled those flights.

Lipow says oil demand in China is down 25-30 percent because of the outbreak. Globally, he estimates jet fuel demand has been reduced by 500,000 barrels per day and gasoline demand has fallen by about 1 million bpd. Crude oil is refined into jet fuel and gasoline.

Lipow says it’s too early to know where oil prices go from here because a lot hinges on what happens at next week’s OPEC+ meeting. Originally there was talk of a 600,000 bpd cut, but now they’re discussing a 1 million barrel per day cut.

“Saudi oil sales to China in March are down by 500,000 barrels a day,” Lipow said. “So we're expecting that the Saudis are going to press their partners for an additional five hundred thousand barrels a day cut.”

OPEC and its allies last cut production in December, and have removed a total of 1.7 million bpd from the market since January 2017.

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“The oil market, like the equities market, is reacting to the new headlines, whether it's new coronavirus cases being reported or businesses that are cutting back on travel or business plants or factories that are shutting due to the inability to get parts,” Lipow concluded.

EXXON MOBIL, CHEVRON VICTIMS OF OIL COLLAPSE

The unraveling has pushed S&P 500 energy stocks into a bear market, as tracked by Dow Jones Market Data Group. Dow members, Chevron and Exxon Mobil are also hard hit.

Ticker Security Last Change Change %
XLE ENERGY SELECT SECTOR SPDR ETF 48.33 -0.42 -0.86%
SPY SPDR S&P 500 ETF 417.30 +1.40 +0.34%
XOM EXXON MOBIL CORP. 56.65 -0.32 -0.56%
CVX CHEVRON CORP. 103.00 -0.43 -0.42%