COVID-19: Oil prices, jobs slashed as global coronavirus spread continues

Click to play video: 'Global markets fall as fears over COVID-19 pandemic rise' Global markets fall as fears over COVID-19 pandemic rise
WATCH ABOVE: Global markets fall as fears over COVID-19 pandemic rise – Feb 28, 2020

With the viral outbreak spreading to more countries, the price of oil has dropped precipitously as global demand weakens even further.

That has sent shares tumbling for oil giants like Exxon and Chevron while smaller producers with idling rigs continue to slash jobs.

Hundreds of new cases of the virus that causes the COVID-19 disease have been announced in recent days outside of China. The list of countries touched by the illness has climbed to nearly 60 as Mexico, Belarus, Lithuania, New Zealand, Nigeria, Azerbaijan, Iceland and the Netherlands reported their first cases.

Story continues below advertisement

READ MORE: Mapping out the coronavirus: Here’s which countries have reported cases so far

More than 85,000 people worldwide have contracted the illness, with deaths topping 2,900.

Oil industry analysts fear that what they thought was a contained disruption may instead lead to more travel restrictions and even less oil consumed.

“That was the fear all along, that the virus would not be contained in China,” said Claudio Galimberti, head of demand, refining and agriculture at S&P Global Platts. “There are entire cities, and in some cases regions, that are in a lockdown. When you begin to have a lockdown, people work from home, factories shut down, people don’t travel. The impact on oil is very, very bad.”

READ MORE: COVID-19: Canada’s public health agency weighs stronger protection for workers

Oil prices fell dramatically in mid-February, but had been steadily climbing back as the number of new cases of the virus in China slowed. In the last week, however, reports of the spreading virus knocked prices down.

The benchmark for U.S. crude oil fell 16 per cent during the week, settling Friday at $44.76 a barrel. Brent crude, the international standard, dropped 14 per cent for the week to its lowest levels since July 2017, closing Friday at $50.52 a barrel.

Story continues below advertisement
Click to play video: 'COVID-19: Military disinfects site at centre of South Korea outbreak as new cases rise' COVID-19: Military disinfects site at centre of South Korea outbreak as new cases rise
COVID-19: Military disinfects site at centre of South Korea outbreak as new cases rise – Feb 29, 2020

Meanwhile, shares of Exxon Mobil tumbled to $49.82 on Thursday, reaching a 15-year low, before rebounding more than 3 per cent on Friday. Chevron Corp. shares hit their lowest level in nearly four years on Friday.

The Financial Times reported that Saudi Arabia is pushing for deep cuts in oil production to help stabilize prices in the face of falling demand.

The newspaper, citing people familiar with the talks, said the Saudis propose to bear most of the brunt of a cutback of 1 million barrels per day but want Russia and other big producers to join them. Representatives of OPEC and allies like Russia plan to meet next week.

READ MORE: Is Canada ready for a widespread coronavirus outbreak? Yes and no, experts say

Story continues below advertisement

If demand for oil and the price of a barrel continues to fall, that may result in lower gasoline prices — a potential bright side for consumers, who account for about 70 per cent of U.S. economic activity.

Gasoline prices have been fluctuating in recent weeks, but nothing significant that could be attributed to the coronavirus, said Jeanette Casselano, director of public relations at AAA. Prices tend to rise for the summer driving season, but the effects of coronavirus on the price of oil could mitigate that.

READ MORE: Iran prepares to test ‘tens of thousands’ for COVID-19 as cases spike

Lower prices at the pump, however, aren’t necessarily good for the U.S. economy overall. When energy prices fall, energy companies tend to cut back on investment and jobs.

A freefall in gasoline prices led to a sharp drop in U.S. business investment in 2016, for instance — one reason the country’s economic growth slowed to 1.6 per cent that year from 2.9 per cent in 2015.

When the coronavirus first hit, the Energy Information Administration predicted global oil demand would fall to 100.3 million barrels per day in the first quarter of 2020, down about 900,000 barrels, or 1 per cent, from what was estimated in January.

Story continues below advertisement

The agency said it expects global oil demand to rise by 1 million barrels per day in 2020, which is lower than its growth prediction last month of 1.3 million barrels per day this year.

Those numbers were released in mid-February, before the number of reported cases outside of China began to rise significantly, so analysts expect estimates to get worse.

Click to play video: 'COVID-19: Japan PM asks public for help in fighting virus, says Olympics will go ahead' COVID-19: Japan PM asks public for help in fighting virus, says Olympics will go ahead
COVID-19: Japan PM asks public for help in fighting virus, says Olympics will go ahead – Feb 29, 2020

On Monday, ING head of commodities strategy Warren Patterson said he expects travel restrictions and factory shutdowns caused by coronavirus to shave 400,000 barrels a day from global consumption growth, which would take the industry to its lowest level of consumption in a decade.

The financial situation was deteriorating for the oil industry long before the coronavirus hit. Demand for oil was suppressed by ongoing trade tensions with China, concerns about climate change, growing adoption of renewable energy sources and steadily improving energy efficiency.

Story continues below advertisement

In the U.S., many oil and gas producers were already struggling under the financial pressure of low prices, caused in part by oversupply as companies figured out how to produce oil and gas more cheaply than ever before. In the past five years, 208 oil producers have filed for bankruptcy protection after racking up approximately $121.7 billion in debt, according to law firm Haynes and Boone.

READ MORE: 2nd COVID-19 case of unknown origin reported in California

The strain has especially hurt smaller producers that relied on debt and an expectation of higher prices to repay their loans.

“The weakness in the commodity price has driven many companies to the point that they cannot refinance their debt or their lenders have lost patience with the longer-term downturn in the energy industry,” said Charles Beckham, a partner at Haynes and Boone.

In Texas, the number of active rigs fell from 553 in October 2018 to 398 in January 2020. Around the same time, the oil industry in Texas shed about 14,000 jobs, said Karr Ingham, executive vice president at the Texas Alliance of Energy Producers, which has about 2,600 members.

Click to play video: 'What measures have Canadian airports taken since the COVID-19 outbreak?' What measures have Canadian airports taken since the COVID-19 outbreak?
What measures have Canadian airports taken since the COVID-19 outbreak? – Feb 29, 2020

“They’re drilling fewer wells, they’re idling rigs and parking them somewhere until they need it again,” Ingham said.

Story continues below advertisement

It’s hard to know how long the outbreak will continue, and just how deeply the industry will feel the impacts. Many of the countries reporting significant numbers of new coronavirus cases are also large energy consumers, said Kevin Book, managing director of Clearview Energy Partners.

“A demand killer virus that nobody understands points toward an even tougher financing environment,” he said.

AP Economics Writer Paul Wiseman contributed to this report.

Sponsored content