The Fuse

OPEC+ Meets To Decide Cuts In Response to Coronavirus

by Nick Cunningham | February 03, 2020

OPEC+ is mulling an emergency meeting in order to rescue the oil market from a dramatic meltdown.

WTI dropped below $50 per barrel, the lowest level in more than a year.

The spread of the coronavirus has completely upended forecasts for oil demand this year, although there is still a great deal of uncertainty over the magnitude of the impact. For now, sentiment has deteriorated rapidly. On February 3, WTI dropped below $50 per barrel, the lowest level in more than a year.

Coronavirus hits demand
The Chinese government has moved aggressively to try to contain the outbreak of the coronavirus, quarantining entire cities and essentially locking down tens of millions of people. Airlines have cancelled thousands of flights.

The human toll is worrying. In late January, the World Health Organization declared the outbreak a Public Health Emergency of International Concern, which means the WHO sees it as a significant threat beyond China’s borders. Several hundred people have died and thousands more infected.

The response to contain the virus is already having a dramatic impact on the Chinese economy, resulting in ripple effects across global markets. Bloomberg estimates that China’s oil demand has fallen 20 percent, or about 3 million barrels per day (Mb/d), which would amount to the largest demand shock since the global financial crisis over a decade ago. The Baltic Exchange’s capsize index, a proxy for global maritime shipping activity, fell to an all-time low. “It is truly a black swan event for the oil market,” John Kilduff, a partner at Again Capital LLC in New York, told Bloomberg.

To be sure, this is a rough estimate, and other analysts have varying degrees of revisions to their demand outlooks. However, it is safe to say that consumption will take a hit. The economy has slammed on the breaks, with the need for refined fuels vastly diminished.

According to Reuters, China’s independent refineries in eastern Shandong province, which account for about one-fifth of the entire country’s imports, have reduced operations by 30 to 50 percent.

The run cuts have translated into storage rapidly filling up at China’s top oil import terminal in Qingdao, Reuters said. “The situation is grim – we have gasoline and diesel demand shrinking on one hand, and fuel logistics stalling on the other as local governments put in traffic curbs to contain the spread of the virus,” a plant executive based in Dongying, a refining and chemicals hub in Shandong, told Reuters.

Analysts are scrambling to revise their figures, but there is a ton of guesswork at this point. “China’s largest refinery operator intends in February to cut its crude oil processing by 12% or 600,000 barrels per day,” Commerzbank wrote in a note on Monday. “This means that a key pillar of global oil demand would fall away, at least temporarily.”

“For now, we have cut 190,000 b/d of oil demand from the 2020 annual average in China, mostly in transportation fuels, and with February and March seeing around a 1 million b/d reduction vs our prior forecast,” JBC Energy said in a note.

Citigroup slashed its Brent forecast for the first quarter to $54 per barrel, down from $69 previously.

Citigroup is more pessimistic, slashing its Brent forecast for the first quarter to $54 per barrel, down from $69 previously. For the second quarter, the bank cut its forecast to $50, down sharply from its previous estimate of $68. Citi said that the Chinese government’s efforts to contain the virus amount to a “major shutdown of the economy.”

Citi said that Brent could fall as low as $47 in the next three months. “The large oil price revision comes from the view now that this outbreak could have a longer and deeper demand impact than earlier thought, though there remains plenty of uncertainty, with much still depending on how far the virus spreads,” Citi’s Ed Morse said.

OPEC+ considers deeper cuts
On February 4 and 5, OPEC’s Joint Technical Committee (JTC) will to meet to weigh potential responses to the coronavirus and the sinking oil market. After the JTC meeting, the full OPEC may meet next week to consider an emergency supply cut. Russia’s foreign ministry confirmed that President Vladimir Putin had a phone conversation with Saudi King Salman bin Abdel Aziz Al Saud on Monday, in which the oil market was “thoroughly discussed.” The ministry said that both sides “confirmed their readiness for further coordination of actions in the OPEC+ format to ensure stability of the global oil market.”

Convincing all members of the OPEC+ coalition to go along with a particular policy can be challenging, but it appears that all sides are converging on some plan of action. According to the Wall Street Journal, one possibility is a collective cut of an additional 500,000 barrels per day (b/d), lasting until the end of the outbreak. A second option would be a unilateral cut by Saudi Arabia of around 1 Mb/d.

Notably, OPEC+ just implemented the additional cuts that were agreed to last December, which went into effect at the start of the year. Just weeks later the group finds itself mulling deeper reductions. With Brent now dropping to $55 per barrel, the lowest point in more than a year, OPEC+ apparently feels it has no choice but to act.