OPEC+ mulls deeper cuts to mitigate coronavirus demand fears

LONDON (ICIS)–To avert oil’s current downtrend, February must be the month OPEC takes action to rebalance the oil market, currently plagued by coronavirus angst.

There are signals that OPEC kingpin Saudi Arabia, as well some other members, are intent on moving the 5-6 March meeting forward to mid-February in order to address the growing coronavirus-driven demand fears.

This could involve a further production curb of 500,000 bbl/day, taking the total OPEC cut to 2.2m bbl/day.

The force majeure on Libyan exports remains a wildcard, with a cease to the port blockades instantly unlocking the millions of barrels of crude in storage accrued since the 18 January. Should this happen in February it would compound downside pressure, further undermining oil prices.

SARS
The spread of a new strain of coronavirus (2019-nCoV) will likely keep a lid on oil prices throughout February, unless the accelerating spread of infection begins to lose momentum.

There are currently more than 20,000 confirmed cases in China, with infection also spreading to at least 20 other countries.

The scale of the outbreak has now reached a comparable size to that of the Severe Acute Respiratory Syndrome (SARS) outbreak of 2002-2003, which also originated in China.

This time, attempts to contain the virus in China appear to have been more effective. However, as the world’s largest oil importer, and the second largest oil consumer, the impact on oil demand will likely be larger.

According to Goldman Sachs, the tangible impact of a SARS-scale epidemic on today’s oil market would lead to demand loss of 260,000 bbl/day, larger than in 2002-2003 due to the growth of the Chinese middle class and increased air travel.

This outbreak is already far larger than SARS, suggesting the scale of the lockdown to contain the virus will have to be greater and thus the damage to oil demand worse.

China’s Sinopec, the largest refiner in Asia, is understood to be cutting throughput by 600,000 bbl/day February in response to falling consumption due to coronavirus.

2019-nCoV
A crucial question for the outbreak is how infectious this new strain is. This number is known as the R0, and indicates the number of people an infected person will pass the virus on to. A higher R0 denotes a higher number of potential cases, greater lockdowns to contain the virus and thus a deeper dent in oil demand.

Over the past weeks, at least six teams of researchers from various institutions have published estimates of R0, with most hovering in the upper bounds of 2 – 3. This is largely in line with the SARS epidemic.

Unlike SARS, it appears that the virus can spread during its incubation period of up to 14 days, possibly before the infected person is showing symptoms, making 2019-nCoV harder to contain.

This has led to some scientists estimating that the actual number of cases could be many times current figures.

The World Health Organization (WHO) estimates that control measures reduced the R0 of SARS from ~2.9 to 0.4 by preventing travel and quarantining individuals showing symptoms. In the case of 2019-nCoV, reducing the R0 will be much harder.

PLAGUING THE ECONOMY
China’s share of global GDP is four times as large as it was during the SARS outbreak, meaning the impact on global economic growth and oil demand will be greater. The epidemic is estimated to have taken between 1.2% – 1.5% off China’s GDP growth at that time.

OPEC’s 2003 oil report estimated that the economy of the Asia Pacific as a whole contracted by about 1% at an annualised rate during in Q2 of 2003.

It’s expected that much of the impact on economic growth will be mitigated by China further easing monetary and fiscal policy. However, this will only begin to show when the grip of the virus starts to abate.

LIBYAN WILDCARD
Libyan crude oil output is likely to have been slashed by 1.2m bbl/day, with storage facilities brimming the country will have to wind down extraction rates. Libya’s National Oil Corporation said will result in financial losses in the region of $77m per day.

Libya’s National Oil Company (NOC) have declared force majeure on loadings from Zueitina, Hariga, Brega, Es Sider and Ras Lanuf after receiving instruction from senior members of the Petroleum Facilities Guard (PFG) and the Libyan National Army (LNA), under the command of Khalifa Haftar.

However, should the two sides come to an agreement the reopening of exports could apply some downward pressure to oil prices.

The impact is likely to be limited as oil futures are becoming increasingly moved by demand sentiment-driven price swings.

Focus article by Richard Price

Front page image source – Lm Otero/AP/REX/Shutterstock