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Oil prices fall as coronavirus spreads outside China

10:17 AM Mar 01, 2020 | PTI |

New York: With the viral outbreak spreading to more countries, the price of oil has dropped precipitously as global demand weakens even further.

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That has sent shares tumbling for oil giants like Exxon and Chevron while smaller producers with idling rigs continue to slash jobs.

Hundreds of new cases of the virus that causes the COVID-19 disease have been announced in recent days outside of China. The list of countries touched by the illness has climbed to nearly 60 as Mexico, Belarus, Lithuania, New Zealand, Nigeria, Azerbaijan, Iceland and the Netherlands reported their first cases.

More than 85,000 people worldwide have contracted the illness, with deaths topping 2,900.

Oil industry analysts fear that what they thought was a contained disruption may instead lead to more travel restrictions and even less oil consumed.

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“That was the fear all along, that the virus would not be contained in China, said Claudio Galimberti, head of demand, refining and agriculture at S&P Global Platts.

“There are entire cities, and in some cases regions, that are in a lockdown. When you begin to have a lockdown, people work from home, factories shut down, people don’t travel. The impact on oil is very, very bad.

Oil prices fell dramatically in mid-February but had been steadily climbing back as the number of new cases of the virus in China slowed. In the last week, however, reports of the spreading virus knocked prices down.

The benchmark for US crude oil fell 16 per cent during the week, settling Friday at USD 44.76 a barrel. Brent crude, the international standard, dropped 14 per cent for the week to its lowest levels since July 2017, closing Friday at USD 50.52 a barrel.

Meanwhile, shares of Exxon Mobil tumbled to USD 49.82 on Thursday, reaching a 15-year low, before rebounding more than 3 per cent on Friday. Chevron Corp. shares hit their lowest level in nearly four years on Friday.

The Financial Times reported that Saudi Arabia is pushing for deep cuts in oil production to help stabilise prices in the face of falling demand. The newspaper, citing people familiar with the talks, said the Saudis propose to bear most of the brunt of a cutback of 1 million barrels per day but want Russia and other big producers to join them. Representatives of OPEC and allies like Russia plan to meet next week.

If demand for oil and the price of a barrel continues to fall, that may result in lower gasoline prices a potential bright side for consumers, who account for about 70 per cent of US economic activity.

Gasoline prices have been fluctuating in recent weeks, but nothing significant that could be attributed to the coronavirus, said Jeanette Casselano, director of public relations at AAA. Prices tend to rise for the summer driving season, but the effects of coronavirus on the price of oil could mitigate that.

Lower prices at the pump, however, aren’t necessarily good for the US economy overall. When energy prices fall, energy companies tend to cut back on investment and jobs. A freefall in gasoline prices led to a sharp drop in US business investment in 2016, for instance – one reason the country’s economic growth slowed to 1.6 per cent that year from 2.9 per cent in 2015.

When the coronavirus first hit, the Energy Information Administration predicted global oil demand would fall to 100.3 million barrels per day in the first quarter of 2020, down about 900,000 barrels, or 1 per cent, from what was estimated in January.

The agency said it expects global oil demand to rise by 1 million barrels per day in 2020, which is lower than its growth prediction last month of 1.3 million barrels per day this year.

Those numbers were released in mid-February before the number of reported cases outside of China began to rise significantly, so analysts expect estimates to get worse.

On Monday, ING head of commodities strategy Warren Patterson said he expects travel restrictions and factory shutdowns caused by coronavirus to shave 400,000 barrels a day from global consumption growth, which would take the industry to its lowest level of consumption in a decade.

The financial situation was deteriorating for the oil industry long before the coronavirus hit. Demand for oil was suppressed by ongoing trade tensions with China, concerns about climate change, growing adoption of renewable energy sources and steadily improving energy efficiency.

In the US, many oil and gas producers were already struggling under the financial pressure of low prices, caused in part by oversupply as companies figured out how to produce oil and gas more cheaply than ever before.

In the past five years, 208 oil producers have filed for bankruptcy protection after racking up approximately USD 121.7 billion in debt, according to law firm Haynes and Boone.

The strain has especially hurt smaller producers that relied on debt and an expectation of higher prices to repay their loans.

“The weakness in the commodity price has driven many companies to the point that they cannot refinance their debt or their lenders have lost patience with the longer-term downturn in the energy industry, said Charles Beckham, a partner at Haynes and Boone.

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