Oil falls 3%, settling under $50 for the first time in 2 weeks

26 February 2020

Oil fell by 3% on Tuesday, dropping below the $50 mark for the first time in 2 weeks. The spread of the Coronavirus around the world impacted oil demand and this impact outweighed OPEC output cuts.

“Demand concerns are wiping out all of the gains we have made over the last few weeks,” Bob Yawger, director of energy futures at Mizuho in New York.

Since the beginning of the year, Brent is down by almost $10 a barrel and this is despite the OPEC and its allies, agreeing on a supply pact.

Crude Oil inventories are expected to rise this week for the 5th time in a row. Potentially, support could come from OPEN and its allies to include Russia, which is considering whether to further curb output.

Airlines cancel more than 200k flights

The spread of the Coronavirus prompted travel restrictions and induced a massive drop in the demand of trips towards China and within China itself.

So far, the number of global deaths reached 2,761 and confirmed cases went above 80k worldwide.

If we compare the number of flights to, from and within China from a year ago, the number of flights have reduced by 80%.

Usually, the biggest expense of Airlines buying jet fuel. The cancellation of flights is bringing the price of jet fuel down, therefore hitting lowest levels since 2017.

In other circumstances, the reduction of expenses would be welcomed by airline companies, but it also means that demand is getting weaker, thus affecting revenue and hitting profits for 2020.

For the 1st time since 2009, air travel demand is set to fall globally.

 

Can stocks bounce back?

The nervousness of investors in this current global economic situation, made them sell stocks and buy bonds and gold. For the 3rd time in history, the DOW lost 1,000 points. The DOW and the S&P 500 erased their 2020 gains.

Tech stocks were those affected the most. Factories in China are still closed, ships still stuck in ports and the new outbreaks in Italy and South Korea now means that 4 of the 12 largest economies in the world are actively dealing with the virus.

History has shown that epidemics and/or pandemics hit the markets, but on a short-term period, eventually moving towards recovery. But if we take into account the SARS epidemic (2003), at that time, China accounts for only 4% of the world's economy.

Today, it accounts for almost 1/5 of it.

European and Asian stocks have failed to bounce back, and stocks closing so low is a worrisome sign for investors.

"We think we're in pretty good shape in the United States." Donald Trump told reporters in India and "the stock market looks pretty good", sent in a tweet before also mentioning that if he is not elected, the market will crash.

How the governments will respond to the current economic situation will determine whether this is the start of a stock market correction or overreaction.

Financial Events to watch for today

15.30 GMT - EIA Crude Oil Stocks Change