‘Hurricane-force headwinds’ pull oil lower, but the losses aren’t built to last
Oil prices have fallen to a roughly four-month low this month, and U.S. benchmark crude suffered a loss of nearly 16% in January as the coronavirus epidemic intensifies the impact of seasonal weakness in the market, raising prospects for lower fuel oil prices.
The market is “dealing with two issues giving hurricane-force headwinds to oil,” says Patrick DeHaan, head of petroleum analysis for fuel-price tracker GasBuddy. One is seasonal winter weakness in demand and the other is the “Chinese coronavirus and the implications that it could throttle back demand in the world’s second-largest economy.”
U.S. benchmark West Texas Intermediate oil may “drop under $50 before the market finds some sort of traction,” says DeHaan. That would bring prices to their lowest level since January 2019.
WTI crude and global benchmark Brent crude futures on Friday this week marked their lowest settlements since August and October of last year, respectively, with WTI at $51.56 and Brent at $58.16 a barrel. WTI prices finished 15.6% lower for the month, while Brent lost 11.9% this month. Both logged the largest January loss since 1991, according to Dow Jones Market Data.
“The market is betting that the worst is yet to come,” says Manish Raj, chief financial officer at Velandera Energy. There is concern the virus will indirectly lead to economic slowdown in China, as the nation “contributes to more than a quarter of the growth in global oil demand,” he said. Yet, there is “no doubt that actual oil-demand reduction resulting from coronavirus will be temporary at best.”
He said he thinks that the virus-led fears are “overblown,” despite the World Health Organization classifying coronavirus as a global emergency. “We believe that the market has over-reacted,” says Raj. WHO on Thursday designated the outbreak in China a public health emergency of international concern.
“Whereas we expect the disease to continue to spread over the next few weeks, it is unlikely to impact oil demand to the extent reflected in the dramatic price drop seen this month,” says Raj. “As psychological fears give way to on-the-ground reality of sustained oil demand, oil prices will revert back to pre-coronavirus levels.”
Brent crude reached a settlement high of $68.91 in early January before news of the coronavirus really took flight.
The decline in oil prices has also led a fall in gasoline prices. Even before any real media coverage of the virus, there was a “miserable period of transportation demand in the U.S.,” points out Tom Kloza, global head of energy analysis at the Oil Price Information Service.
Implied demand for U.S. motor gasoline over the past four weeks as of the week ended on Jan. 24 was at 8.5 million barrels a day, down 4.4% from the same period last year, according to the Energy Information Administration.
The average national price for regular gasoline fell to $2.495 a gallon on Jan. 29, below $2.50 for the first time since March, according to data from GasBuddy.
DeHaan says given the loss in oil prices, retail gasoline could fall in the $2.30 range “before all is said and done,” though a downward move probably won’t last much more than a few more weeks.
As for oil, there is “no visible impact to demand just yet,” but movements in oil are being driven by fear, says Jay Park, chief executive officer at oil and gas firm ReconAfrica. He notes that there was only a small impact on demand during the SARS outbreak in 2003, but a “significant” decline in prices.
The price impact of the coronavirus could be a drop of about $5 to $10 a barrel in Brent and WTI, he says. He believes that the impact is already priced in, with WTI falling from $63 to $53 and Brent down from $68 to $59 this month.
Keep in mind, however, that “similar illness-related price declines have had an impact for a limited period of two to six months,” says Park.