Effect of Coronavirus On Oil Price
The Oil prices fell to the lowest in more than a year on Monday as the
coronavirus outbreak reduced Chinese demand and sparked potential supply cuts
by OPEC and its allies.
Brent crude settled down $2.17, or 3.8 per cent at $54.45 a barrel, its
lowest since January last year.
U.S. West Texas Intermediate (WTI) crude fell $1.45 a barrel to $50.12
after touching a session low of $49.91, also the lowest since January 2019.
“We have not seen a demand destruction event of this scale that moves
this quickly,” said Phil Flynn, analyst at Price Futures Group in Chicago.
As the outbreak hits fuel demand in China, the world’s biggest crude oil
importer, refiner Sinopec Corp told its facilities to cut throughput this month
by about 600,000 barrels per day (bpd), or 12 per cent, the steepest cut in
more than a decade.
Independent refineries in Shandong province, which collectively import
about a fifth of China’s crude, cut output by 30 per cent to 50 per cent in a
little more than a week, executives and analysts said.
The outbreak could particularly curtail jet fuel demand growth in China,
wrote analyst Paul Sankey, managing director at Mizuho in New York. Wuhan
airport is China’s busiest inland hub carrying about 25 million passengers per
year, and conservative estimates are that the number of travelers have fallen
by about a third, Sankey said
The Organization of the Petroleum Exporting Countries (OPEC) and its
allies, a group known as OPEC+, are considering a further 500,000 bpd cut to
their oil output, three OPEC sources and an industry source told Reuters.
The Wall Street Journal reported that another option being considered
would involve a temporary cut of 1 million bpd by Saudi Arabia to jolt oil
markets.
“The market needs assurances that the supply/demand equation remains in
balance for prices to hit a floor. This suggests a commitment from OPEC not
just to extend oil supply cuts, but even implement deeper ones beyond March,”
said FXTM analyst Hussein Sayed.
Iranian Oil Minister Bijan Zanganeh said the oil market is under
pressure with prices dropping below $60 a barrel, and “efforts must be made to
balance it.”
Ratings agency Fitch on Monday said the coronavirus outbreak could push
the global oil market into surplus and that OPEC+ may need to cut production
further if the outbreak lasts for several months.
On the first day of trade in China since the Lunar New Year holiday,
investors erased $393 billion from the nation’s benchmark equities index, sold
the yuan currency and dumped commodities as coronavirus fears dominated
markets.
The first-month Brent contract traded at 8 cents less than the
second-month contract , a reversal from the front-month premiums seen as
recently as last week. The discount briefly widened to 12 cents, the largest
since July.
“There’s an expectation that it’s not going to last, but we’re
oversupplied in the near term,” said John Kilduff, a partner at Again Capital
in New York.
The U.S. crude’s discount to Brent
lessened to as little as $4.32 a barrel, the least since September. Brent
values dropped more precipitously than U.S. crude since China is the top
destination for crude that is priced relative to Brent, Kilduff disclosed.
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