Page 7 - LatAmOil Week 05 2020

LatAmOil COMMENTARY LatAmOil
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Tension with Iran did not take any supply o the market, but violence in Libya has. Mean- while, 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 effects of the deadly coronavirus continue to exert strong downward pressure on oil prices, signalling that the oil car- tel 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 mar- ket does not over-react based on psychological factors, driven by some traders in the market,” the UAE’s energy minister Suhail al-Mazrouei said last week.
Virus trumps Middle East
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.
According to GlobalData, “repeated inci- dents over the past 12 months have caused only brief spikes in the oil price, with little lasting impact.
Despite the geopolitical situation, prices have remained depressed on the back of underlying assumptions about supply and demand. By historic standards, oil prices have stayed low despite the Middle East’s heightened tensions, which have brought the region the closest to openmilitarycon ictthissideofadecade.”
China’s central bank injected more than 150bn yuan ($22bn) of liquidity into money markets on Monday and will make more cash available throughout the week. The China Securities Regulatory Commission said it was on high alert for abnormal reaction on Monday, before markets reopened. When these markets reopened on February 3 the benchmark Shang- hai Composite Index fell 7.7% (losing $375bn), its steepest one-day decline since August 2015, and the Shenzhen Composite dropped 8.4%.
In response to the growing sense of alarm,
Saudi Arabia is now pushing for a major, short- term oil production cut as it seeks to respond to the impact of the virus on crude demand, according to OPEC o cials.
OPEC and non-OPEC’s Joint Technical Committee (JTC) agreed to meet on February 4 and 5 to debate possible action a er the out- break in China, the world’s largest oil consumer, led to the biggest monthly crude price drop in 30 years.
Under one scenario, Saudi Arabia, would lead a collective reduction of 500,000 bpd that would stand until the crisis was over, cartel o cials said. Another option being considered would involve a temporary cut of 1mn bpd by the Saudis to jolt oil markets, the o cials said.
OPEC and its allies are split over how to man- age oil supply in the face of the deadly coronavi- rus, which has already eroded demand in China. Collective responses by oil producers tend to be more e cient in supporting crude prices, which have lost 15% in the past month.
Time for an OPEC meeting?
Despite the Saudi prodding, the cartel and 10 allied nations led by Russia stopped short of scheduling an emergency meeting of its full delegation this week and agreed to hold the aforesaid technical meeting to access the virus’s impact and make recommendations to members.
Producers would then decide either to approve a small gathering led by Saudi Arabia and Russia — called a Joint Ministerial Monitor- ing Committee — or to hold a summit of all 23 producers in Vienna, the o cials said.
In considering what to do, the world’s biggest producers face two key questions: how long will the crisis last and how severe will the conse- quences will be?
e solutions are, of course, still elusive, but the OPEC-plus group of nations will need to come up with some answers soon.
China is by far the biggest market for OPEC+ crude exports, with the big Persian Gulf produc- ers particularly vulnerable. Almost a quarter of all shipments out of the region last year went to China. Add in the other three big Asian buyers — India, Japan and South Korea — and that share rises to two-thirds. Four Asian countries took two-thirds of the crude passing through the Strait of Hormuz in 2019; China alone took almost a quarter.
It is difficult to overestimate the impor- tance of China to global oil balances. Earlier this month, OPEC’s own forecasts showed the world’s most populous country accounting for more than a quarter of all the growth in oil demand worldwide this year. e International Energy Agency (IEA) saw it playing an even bigger role, with almost 40% of incremental demand in China. Transport fuels, especially gasoline, jet fuel and gas/diesel oil, likely to be hardest hit by the virus, account for nearly 60% of forecast Chinese demand growth this year. e word “virus” was not mentioned in either of those agencies’ monthly reports.
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“ prodding,
Despite Saudi
OPEC and its allies have stopped short of scheduling an emergency meeting
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