Energy Prices Forecast

Economic Forecasts

Chinese Epidemic Weighs on Oil, Gas Prices

Kiplinger's latest forecast on the direction of energy prices

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Inflation 2.2% through ’20, from 2.3% at end '19 More »
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Oil prices are tumbling on fears that the Chinese coronavirus could seriously dent economic activity in the world’s second-largest economy. Benchmark West Texas Intermediate has fallen from about $58 per barrel last week to below $53 now, as the number of cases of the virus jumped over the weekend. China’s attempts to stem the disease’s spread by halting travel in a region with a population of more than 50 million suggests that oil consumption is going to decline sharply. If those travel bans expand and international air travel suffers, China’s oil demand will shrink even more.

How long the price rout lasts depends on how much worse the public health situation becomes, both in China and in other countries that have started reporting infections. Bear in mind that China is the world’s largest oil importer. If its demand remains suppressed for an extended period, the whole global oil market will feel the effects. WTI could slip below $50 per barrel in that scenario, at least for a short time. On the other hand, if authorities can contain the virus and allow normal travel and trade to resume, the hit to oil demand should pass quickly. In that scenario, look for WTI to return to its earlier level near $60 per barrel.

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If public health fears subside soon, we look for WTI to trend higher, trading from $60 to $65 per barrel in March because of stronger seasonal demand. But the situation with the coronavirus bears close watching.

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For now, drivers in the United States will benefit from the drop in oil prices. The national average price of regular unleaded gasoline, which had been rising in recent weeks, slipped by three cents last week, reaching $2.52 per gallon. In the short term, retail fuel prices are almost certain to decline further. Again, if coronavirus fears prove short-lived, oil prices will soon rebound and gasoline prices will resume their previous rise later this winter. Diesel, now averaging $2.97 per gallon, is also down a few cents and figures to dip further in the near term.

Natural gas prices remain near four-year lows, with the benchmark gas futures contract recently trading at $1.91 per million British thermal units. Relatively warm weather is keeping demand muted, and U.S. gas production keeps rising. Unless the remainder of the winter turns out to be particularly cold, it appears that gas prices will stay deeply depressed. Stockpiles of gas in storage are high for this time of year. It’s looking like they won’t decline much by the time spring arrives, which means the glut could worsen in a few months.

Source: Department of Energy, Price Statistics