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Crude Oil Crashes 13% on Coronavirus-Induced Fears

By Jason Hall – Feb 27, 2020 at 7:19PM

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A big jump in Coronavirus cases around the world is creating turmoil in an oil market that's already oversupplied.

Since last Thursday, Feb. 20, major global crude oil benchmarks have given up more than 13% of their value. Brent, which sets the price for more of the world than any other benchmark, has fallen 13.4%, while West Texas Intermediate futures, a major index for U.S. crude, have fallen 12.4% from Feb. 20 to Feb. 27.

At the close of trading today, Brent was at $52.18 per barrel while West Texas crude was at $46.82, both down 26% from the 2020 peak in early January. 

This marks the biggest continuous drop for crude prices so far this year. While both Brent and West Texas crude have experienced other week-long dips, neither had seen a double-digit decrease in prices before seeing at least one trading day when prices went up.

Screenshot of oil and gas prices.

Oil prices haven't gone up in more than a week. Image source: Getty Images.

As a result, energy stocks are taking a pummeling. Over the same Feb. 20 to Feb. 27 period, the Energy Select Sector SPDR ETF (XLE -6.90%) has lost 18% of its value and is now at its lowest level in more than a decade. 

Coronavirus fears compounding worries over the economy

The biggest factor behind this week-long sell-off for crude oil is a steady supply of bad news related to COVID-19, the coronavirus strain that seems to be accelerating in its spread around the world.  Since earlier this month, oil markets have been facing the reality that the coronavirus was likely to stop a 10-year streak of quarterly oil demand growth -- when the International Energy Agency said in its oil markets report that it was likely a decline in Chinese oil consumption that would reverse the global number. 

In recent days, the news has steadily worsened. Oil markets -- and oil stocks -- started the week selling off heavily over weekend news that the coronavirus was spreading to more countries beyond China more quickly than anticipated. The sell-off intensified again on Feb. 27, largely on increased worries that the coronavirus would slow the global economy and further weaken demand for crude oil. 

Oil downturn would happen in an already oversupplied market

A downturn in oil demand couldn't come at a worse time for oil and gas companies. OPEC -- the group of state-controlled oil producers responsible for about 40% of global production -- has already throttled production to prop up prices multiple times over the past couple of years, while U.S. onshore shale production has skyrocketed in recent years. 

The result is a market that's awash in oil supplies and with significant pent-up capacity to add even more production at a time when there's no appetite for it. Combine that with the significant uncertainty over what the worst case may be for the economy as the coronavirus outbreak intensifies, and oil markets could conceivably get worse before they improve. 

There's also a reasonable case that the impact may be much less than that and the economy comes through relatively unscathed. But in the current uncertain environment, oil markets seem intent on expecting the worst. 

Jason Hall has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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