Oil Enters Bear Territory As Coronavirus Builds In Other Countries

But Kemp sees more scope for bullish long-building than further bearish selling: File Iamge/PixaBay

The occasional hiccup aside, the steady spread of China's coronavirus corresponds with a steady decline in crude prices, and news on Monday that Kuwait, Bahrain, Oman, and Iraq recorded their first outbreaks caused oil to drop nearly 4 percent on demand fears.

Brent plummeted $2.20, or 3.8 percent, to settle at $56.30 per barrel, while West Texas Intermediate  fell $1.95, or 3.7 percent, to settle at $51.43.

The coronavirus has infected nearly 77,000 people and killed more than 2,500 in China, but of special concern is a rapid rise in infections in South Korea as well as in Italy.

Tedros Adhanom Ghebreyesus, head of the World Health Organization, stressed that this is not an uncontained spread and the deaths are not large-scale, but he cautioned that "We must focus on containment while preparing for a potential pandemic."

Meanwhile, a glimmer of good news that supports the contention of many observers (including Saudi Arabia) that the virus's impact on demand will be short lived came in the form of local health officials in China on Monday stating that four provinces had lowered their virus emergency response measures.

But Phil Flynn, senior market analyst at Price Futures Group Inc. said crude traders are singularly in action mode at least in the short term: of Monday's activity he noted, "Oil traders were selling first and asking questions later."

In the slightly longer term, John Kemp, commodities analyst for Reuters, pointed out that even though coronavirus related fears are intensifying, the rate of hedge fund sales have decelerated for a third consecutive week.

While hedge funds and other money managers sold the equivalent of 16 million barrels in the six most important petroleum futures and options contracts in the seven days ending on February 18, sales were slower than in the week ending February 11 (74 million barrels), February 4 (131 million barrels), and January 28 (147 million barrels).

Kemp said, "From a positioning perspective, the distribution of risks has switched to the upside, with more scope for bullish long-building than further bearish selling."

But arguably the most important takeaway from Monday's trading was expressed by John Kilduff, founding partner at Again Capital, who said that the $50 level is critical for energy producers because "This is where they really start to hurt: this is where they start to not be able to service their debt, this is where the expense ratio does not work for Wall Street, for private equity, for anybody."