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China’s Coronavirus Highlights the Risks of a Changing Oil Industry

The coronavirus is cutting oil prices and raising the specter of global deflation

While the major cloud companies have taken flight, taking the market up with them, many shares remain becalmed by the coronavirus from China.

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No one really knows how much economic damage is being done. Gambling, flying and cruising have all taken hits. But so far there is no real panic.

Since the start of the year, shares in Wynn Resorts (NASDAQ:WYNN), whose Macau casinos have been closed by the virus, are down just 6%. United Airlines (NASDAQ:UAL), which is suspending flights to Hong Kong, is down 8.4% year-to-date. Royal Caribbean (NYSE:RCL), which banned Chinese passport holders from its line four days ago, is down 15%.

But tech companies which depend on China for their supplies, like Apple (NASDAQ:AAPL) and Nvidia (NASDAQ:NVDA), are holding firm. Alibaba (NYSE:BABA), the largest e-commerce group in China, is up almost 3%.

Oil Is the Next Shoe to Drop

The bigger damage is being done in the oil and natural gas market.

Exxon Mobil (NYSE:XOM) is down 13%, to about $60 per share. West Texas Intermediate (WTI) oil has gone from nearly $60 per barrel to barely $50. Since closing on Anadarko Petroleum last August, a big Texas oil producer, Occidental Petroleum (NYSE:OXY) is down 14%.

Middle East oil producers are frantic. The coronavirus has now claimed more victims than SARS, a similar virus that hit in 2003. Demand for oil from China is down 20%.

There are now fears oil could soon trade for just $45 per barrel. While traders insist this is a near-term blip, and that those who hold their nerve will profit, there are bigger problems ahead.

Turns out there’s a lot of oil out there.

The war in Libya, which slashed production there by 75%, might end. Nigeria is seeking new investment. Chevron (NYSE:CVX) is bringing Venezuela back online.

Then there’s Suriname, where Apache (NYSE:APA) has made a major oil strike. This indicates a series of finds made by Exxon off Guyana extends across the Caribbean basin.

All this good news is bad news, for a market reeling from the growth of cheap renewable fuel from solar and wind, and the rise of electric cars. Tesla (NASDAQ:TSLA) is the unquestioned star of the 2020 stock market so far, up 84% just in 2020 after proving it can scale production.

Oil companies, and oil countries, base their prosperity on asset values. If the value of reserves is cut, because of a glut or falling demand or both, the knock-on effects could be enormous. The shock would reverse what happened in the 1970s, when oil was first used as a political weapon.

China’s virus may have brought that reckoning closer than anyone thinks.

Assessing the Coronavirus Damage

Paolo Pasquariello, a professor of finance at the University of Michigan’s Ross School of Business, writes that the virus is now “raising the possibility of a significant global economic slowdown.”

Even pharmaceutical companies that might be deemed “beneficiaries” of the virus, like Regeneron Pharmaceuticals (NASDAQ:REGN), up 4.2% on the year, and Gilead Sciences (NASDAQ:GILD), up 4.7%, still rely on global infrastructure to drive value. “Bets on volatility may be the only ones providing short-term financial relief as hedges,” Pasquariello writes.

So far, markets are looking past the virus, taking small bites off the players most directly impacted. They are betting that the cloud will continue to power global growth.

But the cloud represents deflation, an economic virus that hasn’t been virulent in 90 years. Cost-cutting in a competitive market always leads to price-cutting.

The full economic impact of the coronavirus has yet to be felt.

Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL, NVDA and BABA.


Article printed from InvestorPlace Media, https://investorplace.com/2020/02/chinas-coronavirus-highlights-the-risks-of-a-changing-oil-industry/.

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