Page 5 - MEOG Week 06

MEOG Commentary MEOG
able to arrest the sharp decline in prices and rus- sia’s reluctance to support the OPEC production cut may signal a potential fissure within the oil producer alliance.
The 13 oil-exporting nations in the cartel, and their partners in what’s called OPEC+, have to be able to react quickly to the rapidly-changing world around them. Instead, they are locked in a debate over whether they should even meet, and what they should agree on if they do. By the time they get answers to those questions, it may already be too late.
Crude had climbed as high as $52.20 on Thursday on hopes of a strong OPEC response but US oil prices retreated to around $50.70 a barrel on the news.
Unlike recent oil tailspins, this one has been triggered by lack of demand, not excess supply. And demand shocks can be more challenging to stop because of the uncertainty involved.
Most concerning for oil market equilibrium, the appetite for jet fuel has cratered because major airlines including American Airlines, Air France and British Airways have suspended all flights to and from mainland China; daily flight cancellations are approaching nearly 3,000. China’s Sinopec has slashed its overall crude throughput by about 13% and its refineries are operating in China at minimum run rates.
Demand for oil has been relatively resilient in the years since the Great recession, boosted by the rapid economic growth in China and India. Previous demand shocks include the Sept. 11
terror attacks and the SArS infection of 2003. An alliance between Saudi Arabia and russia has helped prop up oil prices for the last three years. But the two big oil producers were not in perfect harmony this week, as they have tried to recal- ibrate production targets to cope with reduced demand from China, whose economy has been crippled by the coronavirus epidemic.
A further cloud on the horizon is the potential of an agreement being reached by the warring sides in Libya – which is by no means certain – the restored oil output from Libya would dwarf the tentative production cuts proposed at the OPEC + talks last week. That would turn the current stern test for the cartel into a potentially insurmountable challenge.
The coronavirus has struck at the heart of global demand with US prices dipping below $50 a barrel for the first time in more than a year. If prices don’t recover soon the budgets of nations from Saudi Arabia to Kazakhstan will suffer.
At a strategic level the inability to reach a quick consensus has inevitably raised con- cerns about whether Saudi Arabia, the de facto leader of OPEC, and russia are still able to work together to coordinate oil policy.
On the ground serious action has been taken in China – teeming cities have become ghost towns, flights have been cancelled and facto- ries and schools have been closed. In day to day life, in the economy – and in the commodity and energy markets – there is a lot at stake and uncertainty is adding to the sense of crisis.™
Week 06 12•February•2020 w w w. N E W S B A S E . c o m P5