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Will China's Stimulus Save Oil Prices From the Coronavirus?

Shortly after calm had returned in the Persian Gulf amid the U.S.-Iran conflict, oil prices have plummeted since news of the coronavirus outbreak in China first emerged.

Oil prices had rallied to mid-$60s at the height of the conflict, but by the time coronavirus hit China, the price of West Texas Intermediate crude oil had already eased from multimonth highs to trade just above the $57 level.

On Monday, the price of light crude oil dropped below $50 per barrel for the first time since January 2019. An attempted recovery late on proved fruitless on Tuesday, with a barrel trading at around $49.85 at the time of writing. This implies a decline of more than 25% in the span of four weeks, down from $65.68 on Jan. 8.

It looks like oil prices have failed to react to China's attempt to mitigate the impact of the coronavirus on the economy. On Sunday, the Chinese government announced that it will pump 1.2 trillion yuan ($171 billion) into its financial system to try to protect its economy from the coronavirus epidemic.

On Tuesday, the FTSE 100 Index surged 1.48%. This was mirrored by leading indexes across Europe, with the German DAX 30 gaining 1.52% and the French CAC 40 climbing 1.42%. This has helped stock markets around the world to recover this week, but oil prices remain significantly low.

China is one of the world's biggest importers of oil. Since the World Health Organization issued a statement warning about a potential global outbreak of coronavirus, China's demand for oil has slumped. This has affected oil prices and even the stimulus package announcement does not appear to be helping the situation.

Oil stocks have not been spared either, with a majority of them registering significant declines. Shares of U.S. oil and gas giants Exxon Mobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX) are down 14% and 9%, respectively, while Royal Dutch Shell (RDS) has shed 13% of its market value.

On the other hand, BP PLC (LSE:BP) is down just over 6% after gaining 4% on Tuesday, while newly listed Saudi Arabian Oil Co. (SAU:2222) has dropped 3.3%.

In general, the oil market appears to be experiencing extreme bearish pressure, which is primarily caused by a decline in demand. Ironically, this is usually not the driving force behind the volatility of oil prices.

Investors often look at production and supply numbers in the futures markets to gauge the direction of the WTI and Brent crude prices. Therefore, the next few weeks could be very unpredictable for those looking to trade oil or oil and gas stocks.

Analysts are already predicting that China might be forced to increase the amount it plans to inject into the economy to stem the adverse impact of coronavirus. But unless global fears calm, we might continue to witness more declines in the price of oil.

In summary, the price of oil appears to be adversely affected by fears of a global outbreak of coronavirus. The deadly virus has already been reported in multiple parts of Asia. But with WHO directing all nations to take the appropriate measures to derail the spread, we could yet turn a corner soon.

Disclosure: No positions in stocks mentioned.

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This article first appeared on GuruFocus.