(Bloomberg) -- Oil tumbled as the market opened in Asia on fears China’s deadly coronavirus will crimp energy demand, prompting Saudi Arabia to say it was closely monitoring the situation.
Futures in London and New York plunged more than 3% in early trading as the death toll from the outbreak in China rose and as officials extended the Lunar New Year holiday to help stem the spread of the outbreak. While Goldman Sachs Group Inc. predicted last week that global oil demand may take a hit, Saudi Arabia said it believes the crisis so far will have a “very limited impact” on consumption.
Investors are selling oil amid a broad withdrawal from riskier assets and fears the virus will curtail fuel consumption as travel is restricted. Global oil demand may slip by 260,000 barrels a day this year and could shave almost $3 from the price of a barrel of crude, according to Goldman Sachs, using the 2003 SARS epidemic as a guide. Brent crude capped a third weekly decline on Friday, the longest losing streak since June.
“This could be one of the most significant demand destruction events in history,” Phil Flynn, an analyst at Price Futures Group Inc., said by email. “The impact has to be in the hundreds of thousands of barrels of demand loss and counting. Fears of a fast spread will kill oil demand.”
Brent futures lost as much as $2.01, or 3.3%, to $58.68 on the London-based ICE Futures Europe exchange and traded at $59.34 as of 8:21 a.m. Singapore time. The contract dropped 6.4% last week. West Texas Intermediate fell as much as $2.04, or 3.8%, to $52.15.
The sell-off could gather pace as Brent approaches levels at which some U.S. shale companies have hedged their oil prices for 2020. For example, Occidental Petroleum Corp. has hedged this year in a complex deal at a price equivalent to $55 a barrel. As prices approach that level, the Wall Street banks which sold Occidental the insurance may be forced to sell to offset their exposure.
Saudi Energy Minister Prince Abdulaziz bin Salman said the world’s largest oil exporter was closely monitoring the situation both for its impact on the Chinese economy and the oil market fundamentals. Yet, he said that the same “extreme pessimism” that’s afflicting the oil market also occurred in 2003 during the SARS outbreak, “though it did not cause a significant reduction in oil demand”.
“The current impact on global markets, including oil and other commodities, is primarily driven by psychological factors and extremely negative expectations adopted by some market participants despite its very limited impact on global oil demand,” the prince said in a statement.
To contact the reporters on this story: Aaron Clark in Tokyo at aclark27@bloomberg.net;Javier Blas in Davos at jblas3@bloomberg.net
To contact the editors responsible for this story: Serene Cheong at scheong20@bloomberg.net, Alexander Kwiatkowski, Ben Sharples
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