US oil tumbled another 2.8% on Monday and briefly broke below $50 a barrel for the first time since January 2019. Crude finished at $50.11 a barrel, leaving it down nearly 21% from the recent closing high of $63.27 a barrel on January 6. A bear market is frequently defined as a drop of more than 20% from previous highs.
“There’s a lot of fear in the market. And a lot of forced liquidations,” said Ryan Fitzmaurice, energy strategist at Rabobank.
Oil prices had been on the rise to start the year as investors bet the US-China Phase One trade deal would revive the global economy. Crude also momentarily spiked on surging tensions between the United States and Iran.
‘Things really snowballed’
“This virus showed up and that’s when things really snowballed,” said Fitzmaurice.
The coronavirus has alarmed investors because it’s spreading rapidly in China, the most important source of demand for energy in the world. China relies on heavy amounts of oil to keep its fast-growing economy humming and to move its enormous population.
“The question is how quickly will the virus get contained, allowing economic activity to resume?” said Ben Cook, portfolio manager at BP Capital Fund.
Demand is dropping sharply
In a worst-case scenario, oil demand is expected to plunge by 2.6 million barrels per day in February and 2 million barrels in March, according to Platts Analytics. Even the best-case scenario by Platts calls for a drop of 900,000 barrels in oil demand for February.
Yet unlike these prior plunges, this bear market is being driven by diminished demand, not excess supply.
History shows it can take the energy market time to rebound from health shocks.
It took US oil prices more than 10 months to recover in 2003 from the SARS crisis, according to CFRA Research.