The oil market was not prepared for the unexpected impact of the coronavirus and the oversupply that was already in the market just got worse. The uncertainty is depressing prices and that situation appears to be now priced in for the first quarter.
In Friday trading, Brent crude was holding above US$57 and WTI just below US$52 a barrel.
The market had hoped and assumed that the virus would be contained by now, but news of additional cases are spreading fear.
More than expected
Oil demand in China has fallen more than expected due to curtailment on travel and trade with the numbers now effecting around 2,000 people.
Chinese health officials talk about containment of the virus but key players will cautiously re-enter the market knowing that the uptake in travel and trade will be gradual.
The international Energy Agency estimates that oil demand has fallen by close to half a million barrels because of the virus.
This fall-off in demand in the first quarter is the worst seen since the 2009 financial crisis. There’s been some resumption from refineries but the process is slower than expected and oil product inventory is higher than usual.
Lack of Chinese demand in the first half of the year will continue to impact the market but analysts are hopeful for a more positive picture in the longer term.
OPEC has remained tight-lipped since its last technical meeting recommending a deeper production cut and there’s been no more talk of an emergency meeting.
The scheduled extra meeting already in the minister’s diary looks like it will take place in the first week in March as planned. As the panic around the virus calms, many analysts are wondering if OPEC and friends will deepen the cuts to help correct the supply glut.
The group is already committed until the end of March to managing 1.7 million barrels a day of lower production but many believe that Russia and OPEC will need to initiate even deeper cuts.
OPEC issued its February oil market report this week where it said that slowing output in the second half of 2019, “led to a downward economic growth revision for 2019 of 2.9 percent.”
Looking at 2020 GDP, the organization fears that “the Coronavirus-related impact, in combination with a weakening economy in the Euro-zone and India, triggered the 2020 GDP growth downward revision to 3 percent.”
Taking this into account, OPEC downgraded its world oil demand growth by 0.23 million barrels a day from the previous month, putting global oil demand at just above 100 million barrels of oil a day for the year ahead.
Goldman Sachs has downgraded its oil demand outlook for the year ahead and said it expects the average price for 2020 to be around US$53 a barrel, down US$10 from its earlier forecast. The investment bank also cited the uncertainty about the upcoming OPEC production decision in March as impacting their decision.
With voluntary supply off the market from the OPEC Plus group, oil production from Venezuela, Iran and Libya is also off the radar.
The blockade at the Libyan ports continues to restrict exports from key locations as militia groups loyal to commander Khalifa Haftar block exit routes for tankers. Oil production is down to 135,000 barrels a day, according to a statement from the Libyan National Oil Corporation.
OPEC and friends know that weakening oil demand from a country as big as China will have an impact on global oil demand. In coming weeks, they need to find a united message to calm the markets and restore stability.