Coronavirus hits oil too, worries plunge prices

Oil prices fell more than 2% on 3 February, as traders were concerned over demand in China following the deadly coronavirus breakout but prices rebounded on 4 February as trading sentiment across the Asia-Pacific region somewhat improved.
Brent crude was at $54.66 a barrel on 4 February, up 21 cents, or nearly 0.4%, while US West Texas Intermediate (WTI) crude was up 32 cents, or 0.6%, at $50.43 a barrel, Reuters reported, adding that both Brent and WTI are currently down by more than 20% from this year’s peak on 8 January.
Justin Urquhart Stewart, director at Seven Investment Management in London, told New Europe by phone on February 3 that the Chinese coronavirus was responsible for the oil price slump. “It’s the Chinese and it’s interesting to see how quickly they will come up with a message on the impact it has economy. For the 1-2 percent reduction in GDP is very significant indeed and it’s not so much whether they are necessarily affecting what oil they are purchasing, it is the reaction affect around the globe,” he said.
Urquhart Stewart compared coronavirus to SARS (Severe Acute Respiratory Syndrome), a virus identified in 2003. “If we’re having something the same scale as SARS, it will have an even worse reaction because we’re much more interconnected now than we were then,” he said.
The London-based expert explained that it’s not so much the oil demand and price, it will be down to that level of confidence which the coronavirus has hit and the longer that goes on, it will increase the level of weakness. “But the Chinese are taking steps in terms of re-investment to make sure support and they have the reserves to do it, they can quite easily do it. But if it grows into something that is more significant internationally, then be prepared for a more significant slump in oil prices and from where we are now, we could be going down to 50s,” he said.
According to Urquhart Stewart, the first things to be affected are anything to do travel, tourism and everything involving vacations and holidays. “Basically, the world economy slows up in terms of speeding so that will impact then on the broader economy depending on the nervousness of investors and the reactions from governments. So far, it’s been quite well handled. The Chinese market dropping was quite spectacular but not unexpected,” he said. “Nothing so far to worry about it but that can easily change if somehow if that spreads more significant to other areas of the world as a more pandemic scale than is at the moment,” he added.
Concerned by the recent drop on oil prices, the Organization of the Petroleum Exporting Countries (OPEC) and its allies including Russia, a group known as OPEC+, are reportedly considering a ministerial meeting on 14-15 February where they will discuss cutting their oil output by a further 500,000 barrels per day due to the impact on oil demand from the coronavirus, Reuters reported. That would add to cuts of the same amounts agreed in December and bring the restrictions to 2.2 million barrels a day.
But Urquhart Stewart told New Europe that OPEC+ is unlike to take any drastic measures. “I think at the moment they would be rather circumspect and not do anything which would seem to be a violent reaction because if they react too quickly then the market would think that they see things where the rest of us can’t and therefore get worried so if I were them it for the time being,” he said.
But Saudi Arabia, which is currently producing around 9.7 million barrels a day, is pushing for a major short-term oil production cut as it seeks to respond to the impact of coronavirus on oil prices. “The statement says they would react in the short term if they deemed it necessary,” Urquhart Stewart said.