Abu Dhabi, UAEWednesday 19 February 2020

Oil closes worst week in a year as coronavirus worries deepen

Traders fear the virus will cripple demand for oil in an oversupplied crude market

The Johan Sverdrup field centre in Norway - oil closed its worst week in a year on worries the Coronavirus will crimp demand. EPA 
The Johan Sverdrup field centre in Norway - oil closed its worst week in a year on worries the Coronavirus will crimp demand. EPA 

Crude posted the worst weekly decline in more than a year on concern that the spread of China’s coronavirus will cripple fuel demand.

Brent futures sank 2.2 per cent in London on Friday. Deaths from the coronavirus rose to at least 26 and China expanded travel restrictions for about 40 million people in an attempt to halt contagion. The US is monitoring more than 60 people for potential infection and lawmakers said health authorities are expected to confirm a third case.

The Asian virus has spooked traders even as the World Health Organisation stopped short of declaring a global health emergency. The contagion is disrupting travel during the Lunar New Year holiday, when hundreds of millions normally fly or ride home. The selloff has accelerated as trend-following funds turned bearish, according to TD Securities.

“Contagion fears are spiking ahead of the biggest yearly migration ahead of new year,” said Daniel Ghali, a commodities strategist at TD Securities. “The fear factor is the risk of contagion, synonymous to what happened in 2003 with Sars which led to a 2 per cent drop in Chinese economic growth.”

The fast-spreading virus is the latest challenge for a market that’s been buffeted this year by geopolitical turmoil in the Middle East and North Africa, as well as the phase-one trade deal between Beijing and Washington. Goldman Sachs Group earlier this week said if the coronavirus has an impact similar to the 2003 Sars epidemic, demand could be curbed by 260,000 barrels per day. While this is not the first time global oil markets contend with an epidemic threatening demand, the current supply environment could worsen the situation.

“The slightest fear of any economic slowdown will spur a long wave of liquidations because the market is so oversupplied,” said Walter Zimmermann, chief technical strategist at ICAP Technical Analysis.

Some businesses in China including McDonald’s and Starbucks temporarily shut some stores in efforts to contain the virus.

Brent crude for March settlement fell $1.35 to settle at $60.69 per barrel on the ICE Futures Europe exchange in New York, putting its premium over West Texas Intermediate futures for the same month at $6.50 per barrel. Brent futures fell 6.4 per cent this week.

WTI futures for March delivery slipped $1.40 to end the session at $54.19 per barrel on the New York Mercantile Exchange, the lowest level since October. Meanwhile, based on the commodity’s relative strength index, WTI is sitting in oversold territory and is due for a rally.

Options traders are paying the most since October 31 for protection against price swings, according to the CBOE/CME WTI volatility index.

Updated: January 25, 2020 09:46 AM

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