Page 7 - DMEA Week 05

DMEA COMMENTARY DMEA
a ected areas to stay away from work. Russia and several other countries have closed their land borders with China, international airlines are ceasing to y 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 waning 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 producer group was ready to react to any further developments. Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman has also insisted that OPEC+ has the capability to steady the oil market if necessary. e group has been limit- ing 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 the end of 2020. And last but not least, a sharp drop in US drilling activity throughout the latter part of 2019 is likely to slow output from the shale patch.
But the coronavirus outbreak in China has overwhelmed all of those bullish factors. With the seasonal winter weakness in demand also in mind, OPEC is considering moving its March meeting forward as the e ects of the deadly coronavirus continue to exert strong downward pressure on oil prices, signalling that the oil cartel may be more concerned about the e ects on the oil market than it had originally let on.
Saudi Arabia had been quoted as having been prompted to push for an emergency meeting of OPEC+ in February, but that was being resisted by Russia and last week there was still confusion about such a meeting. Saudi Arabia and the UAE also tried to downplay what was referred to as a “market over-reaction” to the possibility that the virus could dent oil demand in the world’s largest oil importer, China.
“It is important that we do not exaggerate projections related to future decreases in oil demand due to events in China, and the market does not over-react based on psychological fac- tors, driven by some traders in the market,” the UAE’s energy minister Suhail al-Mazrouei said last week.
Coronavirus trumps Middle East’s impact on oil prices
As headlines have laid bare, the spread of the Wuhan coronavirus took global oil prices down to $57.06 a barrel in trading on January 30; then down to $55.66 on February 3. is steep climb- down, from a high of $68.9 a barrel on January 6, demonstrates how demand-side considerations in Asia and particularly China – and the threat of a potential pandemic in the region – have risen to the fore.
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