As fears about the spread of the Wuhan coronavirus prompted selling in markets around the world last week, oil was one of the hardest hit. Earlier this week, however, when rumors were circulating about possible OPEC action to offset the fall, futures bounced. The question is, is it reasonable to expect action from the cartel and, perhaps more significantly, is that action needed?
If you stop and think about it logically, further production cuts based on the coronavirus outbreak would be absurd. This is a headline event that has caused a lot of completely unwarranted panic, and we have seen it all before. Whether it was SARS, MERS or Ebola, these outbreaks of scary diseases have become increasingly common of late. That in itself is cause for concern, but, like the others, this specific one will be history very soon.
It could be that over decades, the cumulative effect of these diseases will be to marginally depress global demand for oil, but that would simply mean very slightly slower growth than there would otherwise have been. That hardly justifies the kind of panic selling we have seen over the last week or two.
In context, however, it makes perfect sense.
Oil has been falling dramatically for a month now and in that environment, the impact of any bad news gets magnified. Even the risk of a big but temporary negative impact on demand becomes a major worry and prompts heavy selling. When you look at the chart though, it looks as though that selloff…