Oil Market Impacted By Swine Flu
Crude oil futures fell Monday on barrels for June delivery by $1.41, or 2.7% on the New York Mercantile Exchange due to fears that the recent outbreak of swine flu would further reduce global demand for petroleum products, in particular airline fuel for global travel in North America as consumers seek to avoid the infected areas.
Oil prices slumped as reported human cases of potentially lethal swine flu spread from Mexico, where the death toll has reached 149, to the U.S. and other countries. The widening exposure suggested travelers will stay home, and airline and hotel stocks came under heavy selling pressure.
Oil traders braced for a continued slide in jet fuel consumption. The EU’s health commissioner, Androulla Vassilou, recommended avoiding “nonessential travel to the areas that are reported to be in the center of the cluster,” which would include most of North America.
Cutbacks in international travel would further chisel away at world oil demand that the International Energy Agency already expects will fall by 2.4 million barrels a day in 2009, to 83.4 million barrels a day. Jet fuel and kerosene consumed by member nations of the Organization for Economic Cooperation and Development totaled 3.9 million barrels a day in February, down steeply amid the global recession.
The oil-market impact of the viral outbreak is “probably not that significant,” said Kyle Cooper, director of research at IAF Advisors in Houston. “But in a market that’s already bad, it layers it on.” It is safe to say that it will probably not be trending upward for any time in the foreseeable future.
The flu outbreak recalled the Severe Acute Respiratory Syndrome, or SARS, epidemic. That health threat severely restrained air travel in Asia, reducing global oil demand by about 1% between April and June of 2003, analysts at JPMorgan said in a note.
Incipient rallies have flagged as oil stockpiles sit at their fullest in more than a decade. In the U.S., analysts expect data due Wednesday will show crude stockpiles grew for an eighth-straight week in the week ended April 24. U.S. inventories are at their highest since September 1990.
Goldman Sachs analysts said in a note Monday they see U.S. benchmark oil prices pulling back to the “mid-$40 a barrel range” in the near future to shore up demand and bolster the market.
“The recent weakness in fundamentals has been substantial, with U.S. total petroleum inventories building counter-seasonally in the last several weeks to record-high levels for this time of year and implied U.S. total oil demand collapsing below last autumn’s lows,” Goldman said. The bank recommends selling U.S. crude for July delivery.
Adding to Mexico’s troubles, the country was hit by a 6.0-magnitude earthquake Monday. The tremor was centered in Guerrero, a coastal Pacific state. Mexican state oil company Petroleos Mexicanos is operating normally, a spokesman said, adding that the company is still checking for earthquake damage and it is premature to rule out any incidents.
If the pandemic continues to grow in severity or if more cases spread to urban population points in the North America, then it is likely that prices may continue to drop until the governments provide a solid plan to halt the spread of the disease.