Oil extends decline on concerns about virus' impact on China demand

Andrew Cummings
February 4, 2020

Economists have cut China's growth forecasts as the impact on businesses grows and BP Plc predicted the epidemic could wipe out about a third of global oil demand growth this year.

"Our strategists suggest oil markets appear to be pricing in a demand shock equivalent to that seen during the SARS outbreak in 2003", wrote John Normand, head of cross-asset fundamental strategy at J.P. Morgan Chase & Co.

West Texas Intermediate isn't the only oil blend hit hard.

Beijing has locked millions of people in quarantine and the New Year holiday has been extended. Monday's drop left crude prices at their lowest in more than a year.

Reuters reported Monday that 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 production in the wake of reduced Chinese demand.

If prices sustain above Rs 3,630 levels, then we can expect it to touch Rs 3,660-3,690 on an intraday basis, Axis Securities said in a recent report. OPEC and allies are anxious and are bringing forward the March meeting to this month. One executive said that refinery runs were likely to be cut soon by 15-20 per cent.

That means the world's biggest importer of crude oil, which usually consumes about 14m barrels a day, needs a lot less oil to power machinery, fuel vehicles, and keep the lights on.

OPEC's research department in Vienna has prepared two scenarios with different estimates of how the virus may affect oil consumption, according to a delegate, who asked not to be identified because the information is private.

For now, OPEC has called a technical meeting this week to assess the situation, and the Joint Technical Committee will report back to ministers.

The statement came as so-called OPEC+, which includes Russian Federation, will reportedly discuss output cuts of between 500,000 and 1m barrels a day at a meeting that is expected to take place this week.

"For oil markets, this is the worst crisis, at the worst place, and the worst time", said Roger Diwan, vice president of financial services at IHS Markit Ltd. "OPEC has no option but to cut production as China is going to buy a lot less crude". Russia, which has become the most important producer in the coalition alongside the kingdom, has typically taken some persuading to sign up to additional cuts.

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