Oil prices fell, on Thursday fell more than five per cent after Donald Trump unexpectedly announced restrictions on travel from Europe, an attempt to halt the spread of coronavirus after WHO described the outbreak as pandemic.
The slump in oil is being compounded by the threat of a flood of cheap supply after Saudi Arabia and the UAE said they would raise output in a stand-off with Russia.
Global shares also took a hit after Trump said the U.S. would suspend all travel from Europe, except Britain and Ireland, as he unveiled measures to contain the coronavirus.
According to the Head of oil markets at energy consultant, Rystad Tonhaugen, the oil market was taking the decision very negatively due to the impact on jet fuel demand and expectations for business activity and economic growth.
“It leads to further loss of confidence in governments’ handling of the fallout and increases uncertainty about the extent of the virus impact on the overall economy, reflected in sharp falls in risk assets across board,” Tonhaugen said.
The two benchmarks are down about 50 per cent from highs reached in January.
They had their biggest one-day declines since the 1991 Gulf War after Saudi Arabia launched a price war.
The six-month Brent contango spread LCOc1-LCOc7 from May to November widened to as low as $6.40 a barrel, a level not seen since Feb. 2015.
Contango is where the futures price of a commodity is higher than the spot price, prompting traders to fill tankers with oil to store for later delivery.
The cost to transport oil on supertankers soared as major producers scrambled to secure vessels to ship more crude in a bid to regain market share and buyers took advantage of plunging oil prices.
The Head of Head of MENA research and strategy at MUFG, Ehsan Khoman, said many await to see who would break first in the Saudi-Russian price war.
“We believe that both sides have enough financial capacity and sufficiently divergent goals to sustain the oil price war for many quarters, not months,“ he said.
The U.S. Energy Information Administration (EIA), and the OPEC, slashed forecasts for oil demand because of the coronavirus outbreak and now expect demand to contract in the first quarter.
According to Chief market strategist at FXTM, Hussein Sayed, said if the crisis persists for another two or three months, many companies will go bankrupt, especially those in the U.S. energy sector who deal with oil price war.
Weekly data on U.S. inventories showed minimal effects from the coronavirus pandemic so far. Crude stocks increased by 7.7 million barrels, but inventories of gasoline and diesel fell sharply, as refining runs remain at seasonally low levels.
