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EXPLAINER: Why is the Coronavirus leading to a drop in oil prices?

The outbreak of the pneumonia-like coronavirus has leftover 14,000 people infected and over 300 dead since the first case was reported on Dec. 30 in Wuhan, the capital of China’s Hubei province.

For oil markets, it has had a troubling effect. Oil prices fell on Monday to their lowest in more than a year as the virus spread to 20 other countries, the impact on oil markets may worsen.

Brent crude was at $56.26 a barrel by 0926 GMT, down 36 cents. Prices dropped by more than $1 earlier in the session to $55.42, the lowest since January 2019. U.S. West Texas Intermediate (WTI) crude fell 5 cents to $51.51 a barrel, after earlier hitting a session low of $50.42, the lowest since January 2019.

Oil markets are already so volatile that even a tweet from the US President has the potential to upend the markets. Last year, attacks at Saudi Oil facilities by suspected Yemeni rebels saw prices jump.

In more recent times, Brent crude has dropped more than 10 percent this month even after the U.S. killed a key Iranian general and Libya’s oil production was cut to near zero following a blockade of the nation’s ports that virtually halted exports.

The simplest answer to why oil prices are falling due to the Coronavirus is China. The Asian superpower accounts for at least 14million barrels per day consumption.

Since the outbreak of the virus, Chinese oil demand has dropped by about three million barrels a day, or 20 percent of total consumption.

This drop is perhaps the largest demand shock the oil market has suffered since the global financial crisis of 2008 to 2009, and the most sudden since the Sept. 11 attacks according to Bloomberg reports.

China is the world’s largest oil importer, after surpassing the U.S. in 2016, so any change in consumption has a big impact on the global energy market. The country consumes about 14 million barrels a day — equivalent to the combined needs of France, Germany, Italy, Spain, the U.K., Japan, and South Korea.

Already, OPEC is calling for an emergency meeting of members to address the situation. While many have consented, Russia is yet to give support.

The outbreak of the Coronavirus has led to airlines across the world suspending flights to China, one of the world’s biggest industrial hubs. China has locked down Wuhan city where millions reside in quarantine and have extended the New Year holiday. Usually, the holidays set off increase demand for gasoline and jet-fuel demand as many people scramble to go home afterward, but many cannot leave.

Governments across the world are scrambling to contain the virus and many travel warnings are being issued against travel to China. Industrial activity is slowing as the priority of the government is reining in the virus.

To worsen the impact on global oil markets, the movement of oil cargoes to China from West Africa and Latin America has slowed as unused Chinese inventories are preventing fresh orders.

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