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Investors are worried that a subsequent slowdown in the global economy could dent the demand for crude.
U.S. West Texas Intermediate crude shed 3.65%, or $1.95, to settle at $51.43 per barrel for its worst day since Jan. 8, while International benchmark Brent crude fell $2.20, or 3.8%, to settle at $56.30 per barrel. At the session low WTI fell to $50.45, while Brent traded as low as $55.13.
Prices closed off the lows after Saudi Aramco CEO Amin Nasser reportedly said that the coronavirus impact will be “short term,” according to a report from Reuters.
Again Capital’s John Kilduff said that the $50 level is critical for energy companies. “This is it, this is the line in the sand. This is where they really start to hurt. This is where they start to not be able to service their debt, this is where the expense ratio does not work for Wall Street, for private equity, for anybody,” he said Monday on CNBC’s “Worldwide Exchange.”
Raymond James cut its oil outlook on Monday as the number of coronavirus cases continues to rise.
“There is no escaping the fact that China — the world’s largest oil importer — will have meaningfully weaker near-term oil demand than we had envisioned as the year began,” analyst Pavel Molchanov wrote in a note to clients.
Molchanov said demand in the first quarter will be reduced by an average of 1.5 million barrels per day. He said that a warmer-than-normal winter across the Northern Hemisphere is also hitting demand.
Total confirmed cases of the coronavirus now stands at more than 79,400, while the death toll is more than 2,621. On Monday Italian news agency ANSA said that a seventh person has died in the country, with the number of confirmed cases exceeding 220.
Citi was among the other firms cutting its oil outlook as cases of the coronavirus accelerate.
“The oil market is confronting new signs of weakness, largely from the coronavirus and its impacts on refinery demand for crude oil and from Russia’s refusal to agree to an emergency OPEC+ meeting to curb oil production,” the firm said in a note to clients.
Citi said that it now believes inventories could grow to 2 million barrels per day in February alone, which will put “even more sustained pressure on prices.” A week ago, the firm’s forecast stood at a potential build of over one million barrels per day for the quarter.
The firm also raised its first quarter build projection from 112 million barrels to 145 million barrels, and lifted its second quarter forecast from 53 million barrels to 94 million barrels. “However, our draws for 3Q are lower vs. last week’s estimates,” the firm added.
Molchanov added that since the virus and weather issues are transitory, “the global oil market will need sustainably higher prices in order to avoid a major undersupply in 2021 and beyond.”