One of my energy sector predictions for this year was that oil prices would not drop below $50 a barrel. This may turn out to be the fastest falsified prediction I have ever made.
Since I made that prediction, China has experienced an outbreak of coronavirus, an illness similar to severe acute respiratory syndrome (SARS). So far, the virus has killed at least 41 people in China, and around 1,400 people have been infected.
The country has taken dramatic measures to contain the spread of the virus. The Chinese government has quarantined millions of people in Wuhan, with travel networks shut down or severely restricted.
Cases have now been reported in many other countries in southeast Asia, but cases have also been reported in Europe and the U.S.
Oil prices have already been under pressure as a result of oversupply and slowing economic growth in China. However, travel restrictions will further reduce demand.
There is precedence for a real economic impact from these sorts of outbreaks. Oil prices fell nearly 20% during the 2002-2003 SARS outbreak, but the impact was relatively short-lived as the outbreak was brought under control.
The ultimate impact on demand will depend on how quickly the outbreak is contained, but last week West Texas Intermediate (WTI) and Brent respectively fell nearly 6% and 7%. WTI is presently trading at $54.19/bbl — only 8% above that $50 level.
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