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Traders Scramble To Be First In Line To Ditch Crude Oil

Oil Set For Fifth Consecutive Weekly Drop As Coronavirus Hits Demand

Oil prices were on track for a fifth weekly decline early on Friday, weighed down by the loss of demand in China amid the coronavirus outbreak while OPEC and Russia scramble to come up with a unified position on how to contain the price slide.

At 7:07 a.m. EDT on Friday, WTI Crude was down 0.67 percent at $50.61 while Brent Crude traded down 0.44 percent at $54.67. Oil prices were on course for the longest run of weekly declines since November 2018, according to Bloomberg estimates.  

This week was yet another week in which the market was focused on the demand destruction the deadly virus is causing with all the travel restrictions and thousands of canceled flights to, from, and within China.

Due to weak fuel demand and depressed industrial activity, Chinese refiners—from the biggest refiner in Asia, Sinopec, to the independent refiners in Shandong—are cutting refinery runs, while commodity trading houses and oil majors are scrambling to find spot buyers for crude oil outside China.  

According to estimates from IHS Markit, the virus outbreak is set to knock out at least 1.7 million barrels per day (bpd) of refinery runs in China in February, compared to an otherwise projected growth of 760,000 bpd. This would be “the sharpest single-month decline of 1 MMb/d in history,” Xiaonan Feng, Research Analyst at IHS Markit, said this week.

“Refineries will likely need to extend their production cut throughout March in order to work off the excessive product inventory, but the magnitude of the reduction will likely come down to 500,000-600,000 b/d on a yearly basis if demand recovers following the resumption of business activities and easing of government restrictions,” Feng added. Related: OPEC Aims For 600,000 Bpd Cut, But Russia Remains Reluctant

This slowdown in China’s industrial activity is causing the worst shock to oil demand in over a decade, Jeff Currie, global head of commodities research at Goldman Sachs, said in an interview on Bloomberg on Thursday.

Faced with this demand shock, the OPEC+ coalition is trying to prevent a glut and salvage oil prices, and is considering additional cuts of 600,000 bpd, but OPEC’s key ally in the deal, Russia, was as of Thursday still non-committal and has asked for time to analyze the situation on the market. However, Russia’s Foreign Minister Sergey Lavrov on Friday issued verbal support for the idea. The uncertainty whether, when, and how OPEC and its partners could agree on further cuts also weighs on oil prices.  

By Tsvetana Paraskova for Oilprice.com

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Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.  More

Comments

  • Mamdouh Salameh - 7th Feb 2020 at 11:30am:
    While it is a bitter pill for the oil-producing nations of the world to swallow, one stoical way of dealing with the drop in global oil demand and prices is to do nothing and let the market take its course until the coronavirus is contained. Neither deeper cuts by OPEC nor any other action will do the trick. Only a containment of the outbreak will rejuvenate the market and when it does global oil demand and prices will more than recoup all their losses in the past weeks.

    Any new cuts even by one barrel by OPEC will go down the drain. It will be an ill-conceived and a futile move with no effect whatsoever on oil prices and will only lead to a loss of market share.

    OPEC is being lured by vested interests like the International Energy Agency (IEA) into a trap so as to lose more of its market share and therefore becoming less influential in the global oil market. Fatih Birol, the head of the IEA has already been hyping about OPEC’s share of global oil production declining from over half to 45% in a talk he gave earlier this week at the Baker Hughes AM2020.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
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