Oil Slides Into Bear Market as China Demand, Travel Concerns Slam Crude, Energy Stocks

Oil prices slid into bear market territory this week as China demand collapses amid the accelerating coronavirus outbreak in the world's biggest energy market.
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Global oil prices fell to the lowest levels in more than a year Monday, extending losses from one of the biggest January declines since the early 1990s, as investors count the cost to China's economy from the ongoing coronavirus outbreak. 

Oil pared some of those loses, however, after a Reuters report which indicated that OPEC members, along with non-member allies such as Russia, were considering a further 500,000 barrel per day increase to their 1.7 million in production cuts in order to stabilize global prices.

Chinese stocks fell the most in nearly five years Monday as markets reopened from an extended Lunar New Year holiday amid growing concern that the virus -- which has killed at least 360 people and infected 17,000 others -- will continue to spread across the world's second largest economy.

With factories shuttered, travel restrictions in place and some 40 million citizens under quasi-quarantine, the economic toll of the virus is likely to be significant, with analysts estimating China's first quarter GDP growth rate could slow to around 5%. 

That alone would trigger a sharp re-pricing for global crude, given China's status as the world's biggest energy importer, but with major U.S. and European airlines, as well as regional carries in Asia, suspending flight to and from China for much of the month of February, the knock-on effect to demand could be equally powerful.   

"The big unknown for markets is for how long will travel restrictions be in place, and could these get even stricter? If so, the implications for demand and as a result oil prices only become more significant," said ING's head of commodity strategy Warren Patterson. "If there does turn out to be a prolonged impact from the Wuhan virus then this would be another headache for OPEC+, who had already agreed to deeper cuts over 1Q20 in an attempt to keep the market in balance." 

"Weaker demand now would only make their job more difficult. If we continue to see pressure on oil prices then this could push OPEC+ to make even deeper cuts, although current supply disruptions in Libya (which the market seems to have largely forgotten about) help," he added.

Brent crude futures contracts for April delivery, the global benchmark for pricing, were last see seen $2.08 lower from their Friday close in New York and trading at $55.54 per barrel, extending the decline from their January 3 peak to 20.5%.

WTI contracts for the same month, which are more tightly-linked to U.S. gasoline prices -- as well as the performance of oil majors such as Exxon Mobil  (XOM) - Get Report and Chevron Corp.  (CVX) - Get Report --  were seen $1.20 lower at $49.99 per barrel and have fallen nearly 21% over the past month.

Exxon shares, in fact, traded at the lowest level in more than nine years Monday, while Chevron slumped 1.4% to a one-year trough, after weaker-than-expected fourth quarter earnings and pointed questions over the future of carbon-intensive stocks in an increasingly green-focused investment world. 

"Exxon’s in the fossil fuel business and fossil fuel is the new tobacco," said TheStreet's founder, Jim Cramer. "Managers, and not just young managers, are shedding these stocks regardless of their promise." 

"As the selling knocks the stocks down the self-fulfilling index fund right-sizing caused a further decline," he added. "What’s really incredible about this divesting is that we are just at the cusp of the effort. It’s been mostly smaller funds, so far but they are impacting the stock mightily already." 

The S&P 500 Energy Sector Index has fallen some 12.3% over the past six months -- against a 13.38% gain for the broader benchmark -- and earnings from companies within the index are likely to fall 41.6% from the same period last year to just $12.2 billion over the fourth quarter of 2019, making it the weakest of all reporting sectors in the U.S. market.