Crude Down Nearly 3% As Potential Economic Impact of China Coronavirus Spooks Traders

Travel activity could be particularly affected, says Goldman: File Image/PixaBay

As intimated by activity in the previous session, crude trading on Wednesday continued its downward slide - this time by nearly 3 percent - but unlike the moderate and even constructive outlook analysts expressed for the market in 2020, they have now returned to their familiar dual concerns over the prospects of a global glut and weak demand.

Brent ended the session down $1.38, or 2.1 percent, at $63.21 per barrel, while West Texas Intermediate fell $1.64, or 2.8 percent, to settle at $56.74 per barrel.

Of particular worry to analysts on Wednesday was the emergence from China of a new coronavirus and the possible impact a pandemic might have on global economic growth.

Edward Moya, senior market analyst at OANDA, explained that the virus "Will likely see travel restrictions that could end up hurting demand for crude during a peak travel time in China."

Goldman Sachs elaborated that should the virus develop dramatically and impact travel and growth, demand for oil could fall by 260,000 barrels per day (bpd), including a 170,000 bpd loss of jet fuel demand.

Goldman also noted that although action by the Organization of the Petroleum Exporting Countries (OPEC) could limit any fundamental impact from such a demand shock, "the initial uncertainty could lead to a larger oil price sell-off."

The timeline for all this to happen is sooner than later: "We could see weaker Chinese oil demand over the next several weeks or even longer," said Leo Mariani, energy analyst at KeyBanc Capital Markets Inc., and he added that "Going into the Chinese New Year, we tend to see outside travel throughout China and there's big concerns about a demand shock."

These notions came on the heels of the International Energy Agency stating that it expects the crude market to be in surplus by 1 million bpd in the first half of this year.

Still, some experts on Wednesday reiterated the level-headed sentiment about the crude market in 2020 that influenced the previous session's trading, case in point: Bob Dudley, CEO of BP, told Bloomberg television that U.S. shale has done a lot to mitigate unwanted oil price swings.

He said,"The dynamics of the energy market now, with the United States being the largest oil producer, had damped the big swings...in the past; it is the shift to reducing emissions and being part of the energy transition is going to be the [next] great adventure."