Crude slides more than 2% as coronavirus spread weighs on demand outlooks

Crude futures settled at six-week lows Wednesday as reports of the further spread of the Wuhan coronavirus exacerbated demand growth concerns.

ICE March Brent settled $1.38 lower at $63.21/b and NYMEX March WTI settled down $1.64 at $56.74/b.

"One factor is certainly this coronavirus situation," Again Capital partner John Kilduff said. "The impact to global demand could be meaningful, just at a time when there was a sense that things would be turning up in that department."

NYMEX February ULSD settled down 2.90 cents at $1.8002/gal and February RBOB settled 5.69 cents lower at $1.5796/gal.

Nearly 500 cases have been reported and 17 reported deaths attributed to the current Wuhan coronavirus (novel coronavirus 2019-nCoV) as of Wednesday. Most of the cases have been in China, principally Hubei province, but cases have been reported in Thailand, South Korea, Japan, and the United States, according to the US Centers for Disease Control. The Lunar New Year will increase travel in Asia, and even globally, over the next month and potentially facilitate the transmission of the virus.

S&P Global Platts Analytics estimated Wednesday that in a "disaster scenario" where Wuhan coronavirus is as deadly and contagious as the 2003 SARS pandemic, global jet demand could fall by 650,000-700,000 b/d.

However, Analytics noted the Wuhan coronavirus currently has a mortality rate of 3%, below the 10% rate for SARS, and governments "have better technologies to contain the spread of the virus." Thus it is more likely that the Wuhan coronavirus could lower jet demand by 50,000 b/d to 150,000 b/d for the next two months.

Analytics estimated that the SARS virus reduced global oil demand, led by jet fuel, by 230,000 b/d for around six months in 2003, primarily in the second quarter. However, global jet fuel demand has since grown by 47% to 7.11 million b/d, with "growth heavily concentrated in China, Southeast Asia, and South Asia."

Goldman Sachs analysts said the outbreak could reduce global oil demand by 260,000 b/d, including a 170,000 b/d loss of jet fuel demand if air travel is impacted. This in turn translates into a $3/b impact on benchmark oil prices, although a knee-jerk reaction could push prices lower, the bank said.

"While an OPEC supply response could limit the fundamental impact from such a demand shock, the initial uncertainty on the potential scope of the epidemic could lead to a larger price selloff than fundamentals suggest," analyst Damien Courvalin said in a Tuesday note.

The SARS epidemic was estimated to have cut global GDP by 0.15% in 2003, resulting in a corresponding decline in oil demand, but a more direct impact was from the reduction in air travel, the report said.

According to Platts Analytics, "a widening outbreak of the Wuhan coronavirus, would impact Asian growth at the margin, and perhaps force a slight reduction in world growth. Such aggregate impacts are likely to be small, at this time."

Other analysts downplayed the price impact of the coronavirus news, instead citing oversupply concerns as the primary downward pressure Wednesday.

"Coronavirus concerns had a limited impact on oil prices," OANDA senior market analyst Edward Moya said. "As far as a major driver for oil prices, I don't see it having as much of impact as SARS."

STOCK BUILDS EXTEND FUTURES DECLINE

Oil futures extended their decline in aftermarket trading after American Petroleum Institute supply estimates showed a bearish build in US crude and product stocks last week. US crude supply increase 1.6 million barrels while gasoline and distillate inventories were up 4.5 million and 3.5 million barrels each, according to analysts quoting API data.

NYMEX February RBOB was down around 6.73 cents and February ULSD was 3.93 cents lower at the 2300 GMT trading break, while March WTI was holding around $2.25/b below its open.

"I'm a little hesitant to say worries about epidemic in China is the main driver," Tradition Energy analyst Gene McGillian said, referring to Wednesday's selloff. "The real thing is that a lot of production is supposed to come on the market and when you have any worry about demand stabilizing or growth the market continues to pull back."

The International Energy Agency said last week in its latest monthly report that non-OPEC oil supply growth will accelerate to 2.1 million b/d in 2020 from 2 million b/d in 2019.