Fears of the Coronavirus outbreak in China and potential worldwide ramifications have caused a slowdown in the energy industry (NYSE: XLE), resulting in oil prices to reach low prices not seen since October.
Crude oil prices have dropped past previously established "bottoming out" points, with oil benchmarks Brent (NYSE: BNO) clocking in at $58.99 a barrel and the West Texas Intermediate (NYSE: USO)coming in at $52.70 a barrel. Previously, $60 was considered the "bottom-out" point for oil prices; however, experts have cited fears of the intensifying Coronavirus outbreak as a catalyst for worsening oil prices in an already unfavorable market.
Experts looked to China for the source of the virus-based market slowdown. The Chinese Government's move to lock down infected cities, which includes canceling commercial flights in and out of the cities, will likely become the epicenter for the next big oil price drop since the U.S-China Trade War. The timing of the lockdown and the Coronavirus outbreak coincides with the Chinese Lunar New Year, which traditionally drives demand as families travel to be with one another However, travel restrictions will likely cause a drop in demand, which will cause a glut in the supply of fuel products, primarily jet fuel. The crisis in China is not likely to ease any time soon, especially as the government warns the virus' ability to spread is amplifying.
Short-term outlooks have been largely pessimistic; worldwide fears generated by the uncertainty of the possible scale of the epidemic will likely cause worldwide oil prices to stay low. The full impact of the virus on the energy industry, and the economy in general, is hard to predict because of the wide number of variables, such as whether or not large outbreaks will occur outside China, or if similar travel bans will be enacted elsewhere. There is, however, precedence for the economic impacts: the 2002 SARS outbreak. If the Coronavirus outbreak follows similarly to the SARS outbreak, the largest sector of the energy industry hit will be jet fuel. During the SARS outbreak, Asian based airlines saw an 8% drop in traffic, with smaller effects being felt worldwide. One factor that was not present in 2002 was the volatile energy market, caused by the trade war and tensions in the middle east. As such, oil prices, already relatively low, are likely to stay low over the next few months due to the myriad negative factors currently in play. Jet fuel supply is already increasing due to the decrease in flights and may continue to increase as concerns cause fewer passengers to fly.
Despite worldwide pessimism, there was some confidence from members of OPEC; Saudia Arabian Energy Minister Prince Abdulaziz bin Salman voiced his belief that the outbreak would be contained. Addressing global concerns, Abdulaziz said that markets are "primarily driven by psychological factors and extremely negative market expectations adopted by some market participants despite (the virus') very limited impact on global oil demand." Other experts believed that the course of the Coronavirus would follow a similar path to the SARS virus and that it would be contained within a few months. In general, many experts have a more optimistic outlook for the progression of the outbreak and its effects on the energy market. Most see some form of relief after a few months.