Page 4 - MEOG Week 05

MEOG Commentary MEOG
Coronavirus virus the focus of major oil policy decisions
The coronavirus outbreak in China has caught the attention of the worldwide media. Governments are under great pressure to deal with it but the oil market is also under pressure.
markets
What:
The coronavirus outbreak in China has wide- ranging repercussions.
Why:
The impact of the virus on China’s economy will affect economies and commodities worldwide.
What next:
OPEC is considering steps to keep oil prices high as lower demand from China kicks in.
ThE news of the coronavirus has been changing by the day and this unstable scenario poses chal- lenges for those trying to manage and deal with the oil market.
e eyes of the world have been xed on the health risk from the outbreak of the coronavi- rus in Wuhan, China, but with global travel and trading the virus has the potential to a ect many activities. One of these is the world’s nancial system which has been hit, with markets from Wall Street to Tokyo declining.
China’s National health Commission con- firmed on January 29 that the coronavirus had infected 7,700 people, and there had been 170 deaths; by 3 February these numbers had climbed to 14,000 and 305 respectively. The virus, which was rst discovered in the Chinese city of Wuhan, has spread to other major cities such as Beijing, Shanghai, Macao and hong Kong.
The outbreak coincided with the Chinese New Year, when travel and spending typically spikes.
Many Asian stock markets were closed on Monday for the holiday, but concerns about the impact of the virus on the Chinese economy were felt globally, weighing on travel and fashion com- panies, including luxury brands L’Oreal, hermes and Burberrys. e education sector with many Chinese students studying abroad is also at risk. Oil prices also dropped more than 9% during the week, with Brent crude falling to $55.66 a bar- rel, as traders fear demand could drop if China’s economy stalls. “ e timing [of the outbreak] could not have been worse,” analysts at Oxford Economics said in a research note.
In an attempt to slow the spread of the virus, China has announced travel curbs and quar- antines, while companies in the country have advised sta to work from home.
Businesses are also o ering workers longer holidays, as well as telling employees returning from the most a ected areas to stay away from work. Russia and several other countries have closed their land borders with China, inter- national airlines are ceasing to fly there and on ursday WhO declared that coronavirus is a public health emergency of international concern.
Analysts compared the situation to the 2002
outbreak of Sars, which killed almost 800 peo- ple. In the aftermath, China’s annual growth slumped from 11% to 9%. While this virus is so far less deadly, the economic costs, which include cutting spending through a lack of con dence and the implementation of drastic measures to deal with the virus, could be sig- ni cant across the whole of Asia, and ultimately spread to other countries, including the US and Europe. Of note is the fact that the Gulf region, and Dubai in particular, is a major travel and business hub between Asia and Europe and its links with China have been an important part of the region’s development in recent years.
OPEC’s in uence laid bare
All of this puts OPEC under pressure. OPEC President Mohamed Arkab previously said he believed the virus outbreak would have little impact on the global oil market in the near term, but suggested the Middle East-dominated pro- ducer group was ready to react to any further developments.
Saudi Arabia’s Energy Minister Prince Abdu- laziz bin Salman has also insisted that OPEC+ has the capability to steady the oil market if nec- essary. e group has been limiting supply to prop up crude futures and recently increased its agreed output reduction by 500,000 barrels per day to 1.7 million bpd to the end of March.
OPEC is battling to support oil prices as Chi- na’s coronavirus spreads, with a resultant fall in demand, but its e orts highlight that the group may be struggling to wield its influence over global crude markets, and this comes amid spec- ulation that OPEC and non-OPEC producers, sometimes referred to as OPEC+, could extend production cuts if the intensifying outbreak of the coronavirus continues to hamper oil demand growth.
It would appear that the next OPEC+ meet- ing will be especially signi cant, given the early March gathering will mark two months since the coronavirus was rst detected. Prior to the virus outbreak, there were encouraging signs of a recovery in oil prices. Tension with Iran did not take any supply o the market, but violence in Libya has.
Meanwhile, OPEC and its allies seem likely to extend recently agreed production cuts out to
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w w w . N E W S B A S E . c o m Week 05 05•February•2020