With WTI sliding below $50 on Sunday evening, expect even more downside according to S&P Global Platts' Claudia Carpenter, who writes that oil prices will probably drop to the "mid-$40s" a barrel in the next couple of weeks because of weak demand, according to Matt Stanley, director of Starfuels commodities brokerage.
Supply isn't an issue but demand is and demand growth is so fragile that an excuse like coronavirus has caused the 15% drop in prices the past few weeks, Stanley told the 7th annual Global Commodity Outlook conference in Dubai on Sunday.
Crude prices have dropped significantly in in the past few weeks on concern that the virus outbreak could blunt global crude demand. Front-month Brent settled Friday at $54.47/b, 16% below its most recent peak on January 20, while WTI futures were down 14% over the same period.
OPEC and 10 allies, including Russia, are debating whether to institute deeper production cuts to stem the price slide, but Stanley said the coalition, known as OPEC+, should instead be looking to increase output to revive demand growth. "Cutting supply to keep prices up is not the way to do it," he said. Related: OPEC’s Oil Production Plunges, But It May Not Be Enough
The only big winner of cutting supply would be US shale producers who would boost production on higher prices, effectively pushing prices even lower, he added. US President Donald Trump has probably had his eye on re-election for his second term ever since the first one started, with an eye on supporting the US energy industry so it becomes a key supplier to China, he said, predicting that Trump will win a second term in office.
An OPEC+ technical committee last week recommended that the coalition cut an additional 600,000 b/d on top of its existing 1.7 million b/d cut accord through the second quarter, to combat the coronavirus' expected hit to oil demand. Russia, the main non-OPEC participant, has yet to commit to the deal, which requires unanimous approval by all 23 OPEC+ countries.
The coalition is next scheduled to meet March 5-6 in Vienna, but delegates have said it could be moved forward if a consensus on new cuts can be reached in advance.
The coronavirus has sparked fears of a major economic slowdown in China, the world's largest importer of crude, where quarantines and travel restrictions have caused a contraction in oil consumption. China sources some 70% of its crude imports from OPEC+ members, and its refineries are expected to slash runs by about 1 million b/d in February, according to S&P Global Platts Analytics.
Robert Willock, Middle East and North Africa director at the Economist Corporate Network, part of the Economist Intelligence Unit, said his base outlook for the coronavirus is that China will have the outbreak contained by the end of March. That would mean China's gross domestic product would grow at 5.4% this year, down from 5.9% forecast before the virus, he said.
If the virus is not under control until the end of June, the GDP would grow by 4.5%, he said. "All bets are off" on the GDP forecast if it's not under control beyond then, he added.
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Until the outbreak, China’s economy, the world’s largest based on purchasing power parity (PPP) was projected to grow at a healthy 6.1% in 2020. Moreover, all the fundamentals of the global oil market were positive and the global economy was projected to grow by 3.3%. These positive fundamentals supported by a de-escalation of the trade war would have propelled global oil demand upwards with demand growth projected to add some 1.2 mbd over 2019. The sudden outbreak of the corona virus changed all the calculus.
But with China virtually in quarantine and therefore closed to business and unable to receive crude oil shipments, one could assume that its crude oil demand could decline significantly pushing oil prices down to mid-$40s.
Any new cuts or deepening of cuts by OPEC+ will be a total waste of time, ill-conceived and futile with no effect whatsoever on oil prices and will only lead to a loss of market share. Equally any attempt by OPEC to increase output will prove a real disaster as Saudi Arabia’s discredited policy of flooding the global oil market in the aftermath of the 2014 oil price collapse.
Even if OPEC’s production plunges by 1.0 mbd on top of Libya’s virtual loss of all its production amounting to 1.0 mbd, this will not stop the continued decline in global oil demand as long as the coronavirus outbreak is still raging. This is not due to lack of demand but to physical inability of China to import and receive crude oil while it is in quarantine.
Once the outbreak is contained, China’s crude oil demand and prices will recoup their recent losses.
As for US shale oil production, it will never be a winner as it is in a terminal state. It will be no more in 4-9 years from now.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London