Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
An ounce of prevention may be worth a pound of cure but is devastating for oil demand.
The crude oil market got hit with a bad case of coronavirus fear that has killed 17 people and has infected at least 500 others. It also infected the market, and oil prices plummeted after reports came out that China quarantine two major cities. Wuhan, with a population of 11 million and Huanggang, a city of 7.5 million people. China, in an attempt to control the outbreak, shut down its public transportation system in the lockdown zone, effective midnight Friday local time according to the Wall Street Journal. Ezhou, another neighboring city with just over a million residents, said it would put in similar restrictions.
This comes ahead of a meaningful Chinese’s holiday, the Lunar New Year. So don’t believe that the move lower in oil was caused by a downbeat outlook by the International Energy Agency(IEA) that is again talking its book, as it represents an oil-consuming nation. They love to keep their customers happy. The movement predominantly is about the impact of the coronavirus.
The action by China is already causing fear that this disease may be out of control. The closing down of these cities will have a ripple effect on oil demand as travel to China, and other places, will slow. This could cause a slowdown in the Chinese economy also raising risks for the demand for things like industrial metals.
After the oil market closed, a bearish American Petroleum Institute (API) report did not help. Precautions by China to stop the spread of the virus are causing others to take precautions as well. I know of people who were planning on flying to China change their plans and stop in its tracks what had been a robust bull market. There will be many other cancellations that will cut into oil demand. For oil, this could be the “black swan” event that can thwart what had been a bullish outlook of rising demand and an overestimation of future supply.
The American Petroleum Institute report thwarted any hope that oil might try to put the virus threat to rest. The API reported a crude oil inventory build of 1.57 million barrels. Analysts were looking for about a one million barrel draw. The API also showed another big 4.5 million barrels increase in gasoline supply. The distillate also increased by 3.5 million barrels for the week, adding onto last week’s sizeable 6.8-million barrel build, while Cushing inventories fell by 429,000 barrels.
Still, we still have geopolitical risk in the market place. AHVAL reported that, “The Libyan National Army (LNA) announced on Wednesday that their forces shot down a Turkish airliner after it took off from the Mitiga Airbase near capital Tripoli. The LNA has continued to launch shells at the capital despite their agreement to abide by a ceasefire after the talks held on Sunday in Berlin. “The Air Defense Forces of the General Command of the Libyan Arab Armed Forces shot down a Turkish aircraft after it took off from the Mitiga Air Force Base,” the LNA spokesman Ahmed Mismari said in a statement on Facebook.
Libya since 2014 has been divided into competing political and military factions based in Tripoli the east. The Tripoli based Government of National Accord (GNA), led by Fayez al-Sarraj, is in conflict with LNA forces led by Khalifa Haftar based in the east. Turkey backs the GNA while Russia, the United Arab Emirates and Egypt support the LNA, which has led an offensive to seize Tripoli since April.
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