Oil Prices Surge as Coronavirus Outbreak Threaten Suppliers
Oil has been losing territory against the US dollar since the end of 2019. From January 30, 2019 to February 4, 2020, Brent oil futures lost around 10 percent of their value, while West Texas Intermediate crude oil futures lost about 7 percent. It seems that the recent coronavirus outbreak has weighed on the crude markets, driving the global oil prices lower since China's demand for crude has fallen around 20 percent since the beginning of the outbreak.
The coronavirus epidemic, which currently has a death toll of around 500 victims, has affected the Chinese services and manufacturing sectors in a significant way, resulting in lower crude consumption. It's still not clear to what extent the epidemic will affect the oil demand in the upcoming months and this is, of course, not good news for an already oversupplied market, especially given the dramatic fall of oil prices since 2015 and the failed efforts of oil suppliers to keep those prices stable and at a reasonable level from their point of view.
Lower oil prices may be manageable for big oil suppliers, but the smaller ones will undoubtedly suffer because of this as those conditions usually mean lower revenues, investment, and production, hence the necessity for immediate action. In fact, OPEC and its allies’ technical experts recently met in Vienna to discuss the effects of the epidemic on global demand and about which policy they should implement in order to drive the market prices higher. The 23-nation organization (which provides around half of the world's oil supply) is continuing to discuss the matter on Wednesday and is expected to announce the steps that are going to be taken following the meeting.
OPEC and its allies have long implemented and supported efforts to maintain an oil-producing cartel that would help to keep the oil prices at reasonable levels from the point of view of oil suppliers. In October 2018 the organization agreed on cutting the oil supply by 3 percent, agreeing on a deal that expires at the end of March 2020. The question the organization is facing now is whether they should extend this term and whether further oil supply cuts are needed.
Despite the fact that big players like Saudi Arabia are pushing for further supply cuts, other oil producers don't seem to agree with the idea. For example, Russia, which has broken the terms of the cartel multiple times and whose oil production recently hit a 5-month high, doesn't seem to agree with this initiative, given the high resilience of its oil industry.
The problem is that under the current deal, and even if the term is extended, the market is expected to continue being oversupplied by around 600,000 barrels per day in the first quarter and by one million barrels per day on the next quarter. This provision takes into account the worst-case scenario that the OPEC+ research department considered, which envisages a demand cut of about 400,000 barrels per day. The recent announcement by the American Petroleum Institute regarding the rise of US crude inventories don't help the optimists either.
China has been trying to persuade the pessimists, warning against what they called an “overreaction”. It was also reported that Chinese officials tried to convince the OPEC+ representatives that the impact of the epidemic on oil demand would be limited.
“Any exaggeration and any overreaction is not in the best interest of the general public let alone the market,” said the Chinese ambassador Wang Qun.
The expectations for intervention in the oil market set a positive tone among traders during the Asian session in Wednesday. However, this bullish sentiment among investors may be short-lived, especially if the OPEC+ chooses not to deepen its supply cuts.