SARS CoV, better known as the SARS Coronavirus, and it’s shaping up to be the oil market’s biggest nemesis this year. And there’s no cure.
It impairs your breathing, causes extreme fatigue and fevers. It kills. And beyond that, it’s keeping oil prices low by threatening to stifle oil demand in one of the world’s largest oil markets.
SARS, which stands for severe acute respiratory syndrome, is not only deadly, but highly contagious—more contagious than originally thought, and this coronavirus-inspired fear has now decisively spilled over into the oil market.
With highly contagious and deadly viruses like the SARS CoV, fear rules the day and the result is that people will stop traveling to some extent.
Even the fear that people may stop traveling is enough to result in an economic slump. Whether one catches the virus or not is irrelevant economically speaking—the mere perception that it’s a possibility creates ripples in the world economy as people change traveling, purchasing, and trading patterns.
The oil markets are obsessed with China—specifically China’s demand for oil.
The thought of dampened demand from the world’s second largest oil consumer causes tangible oil production outages.
Although the United States is the largest oil consumer in the world, it’s the oil demand growth that moves prices, and China’s oil demand growth (and India’s too) is far greater than that of the United States. In fact, China’s oil demand has been growing at an annual rate of 5.5%, while the United States’ oil demand has been growing by 0.5%.
Every aspect of the economy hits the oil market. But of particular note is the effect the virus could have on travel, which would affect air travel and road travel, impacting jet fuel and gasoline consumption. And with the persistent robust supplies that are loitering on the market today, slack demand couldn’t come at a worse time.
All of this at a time when the oil market was hopeful of an increase in demand thanks to the Chinese New Year holiday that typically sees an uptick in travel and gift giving.
Against this perceived and real demand impact, OPEC will be mostly impotent, even with Libya’s million-barrel-a-day loss and Saudi Arabia’s overproduction.
This loss, Goldman Sachs predicted, could see oil prices fall by $2.90 per barrel, but oil prices have already fallen more than $4.50 per barrel over the last few days alone.
Already the ramifications of the new virus are taking hold, disrupting everyday life.
In China, movie releases have been pushed back, tourist attractions including the popular Forbidden City are shut down, and people are already cancelling travel plans, according to the New York Times.
The question isn’t whether the virus will depress oil demand; rather, the question is how much it will depress oil demand. And it’s hard to ascertain the true effect, because China isn’t necessarily transparent in just how the virus is progressing.
The travel restrictions will affect tens of millions of people. Flights, trains, buses, subways, ferries, and for-hire cars have also been suspended—all of which will have an immediate effect on fuel consumption.