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Wed 22 Jan 2020 08:37 AM

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Goldman says oil could drop $3 as China's virus spreads

The virus that originated in Wuhan could result in global demand falling by 260,000 barrels a day in 2020, with aviation fuel accounting for around two-thirds of the loss

Goldman says oil could drop $3 as China's virus spreads

Travellers wearing protective masks walk at the check-in area of the Daxing international airport in Beijing on January 21, 2020. Image: AFP

Oil markets are likely to take a hit from China’s deadly coronavirus, with aviation fuel suffering most, if the SARS epidemic in 2003 is any guide, according to Goldman Sachs Group.

The virus that originated in Wuhan could result in global demand falling by 260,000 barrels a day in 2020, with jet fuel accounting for around two-thirds of the loss, Goldman said in a note. Oil prices would likely drop by $2.90 a barrel as a result. The bank’s projections translate the estimated SARS demand impact into 2020 volumes.

The coronavirus is causing nervousness across financial markets, especially because it’s spreading just as hundreds of millions of Chinese prepare to travel domestically and internationally for the Lunar New Year holidays. If the epidemic goes worldwide it would add another wildcard for oil markets which have already been roiled by geopolitical tension in the Middle East and North Africa this year.

“While an OPEC supply response could limit the fundamental impact from such a demand shock, the initial uncertainty on the potential scope of the epidemic could lead to a larger price sell-off than fundamentals suggest,” analysts Damien Courvalin and Callum Bruce said in the note.

Oil price volatility may rise in the coming weeks, although Goldman still sees a sustained backwardation in Brent crude this year as the overall impact on fundamentals remains limited so far. Concern over the virus’s impact on oil demand, however, is expected to counter jitters around supply disruptions across Libya, Iran and Iraq.

The profit from turning crude into aviation fuel and jet fuel’s premium to diesel were already falling on Tuesday and could drop further. During SARS, Singapore jet fuel prices weakened relative to other regions. The International Air Transport Association estimated a decline of 8% in annual traffic for Asian airlines during the outbreak, while North American carriers experienced a smaller drop.

Health officials around the world are currently racing to gauge the danger posed by the new SARS-like virus with the first diagnosis being reported in the U.S. The number of total cases in China has been confirmed at 440 with nine dead.

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