This morning, WTI crude oil prices traded as low as $52.13/barrel, the lowest level since October of last year. With threats of the Coronavirus spreading, travel and trade have become a factor in this sell off. With the fear of the disease spreading until there is a vaccine, traders forecast travel will be subdued, meaning oil demand will decrease and thus so do oil prices.
Why does this virus have an effect on the oil and gas industry? Claiming a death toll of eighty-one people so far, this virus has caused a travel ban which not only effects supply but demand as well. On the supply side, you would see a shortage due to petroleum imports and exports being affected which would typically cause a rise in price; however, China is the world’s second largest consumer in oil. With a population of roughly 1.437 billion people, we see demand decrease from the use of fossil fuels on the restriction of transportation. With the high output on transportation alone in China, these travel restrictions cause the supply to outweigh the demand which is where we see the significant drop in crude.
This past Thursday, crude inventories fell 405,000 barrels; however, inventories in the industrialized world are above the five year average according to OPEC. A stockpile draw with China, along with United States production remaining at record levels, is a serious result of this ban. We do not know how long it will take to keep the virus contained. Past epidemics, such as the Swine Flu in 2009, caused travel restrictions to take effect for several months to certain areas. It is still too early to tell how long the travel restriction can affect China’s oil consumption.