Page 6 - LatAmOil Week 06 2020

LatAmOil COMMENTARY LatAmOil
Oil prices still under pressure from coronavirus
After last week’s convulsions involving the OPEC-plus group’s attempt to formulate a response to the economic effect of the outbreak in China, the story has run on into a second week
WHAT:
OPEC has not been able to agree on a plan to halt the slide in oil prices.
WHY:
Russia has refused to support the proposed production cuts.
WHAT NEXT:
Oil prices are spiralling downward, and pressure continues to grow for a resolution.
OVER the past week, oil prices have continued to be under pressure from the knock-on effect of the coronavirus outbreak in China.
On the back of reports of possible medicinal advances to combat the virus, oil prices rose slightly. Brent futures initially rose by $0.77 to $56.05 a barrel, and US West Texas Intermediate (WTI) futures rose $0.95 to $51.70 a barrel.
Hopes of a breakthrough have, however, been played down by the World Health Organi- sation (WHO). Meanwhile, over the past week, there has been an increase in the number of people infected to 40,000. There have also been more than 900 deaths, and large parts of China’s economy have been brought to a standstill.
Russia’s role
Despite continuing talks in Vienna for three days, OPEC and Russia – through the Joint Technical Committee (JTC) – were unable to agree on a rescue plan for the price of oil.
The committee was tasked with making recommendations to the ministers of OPEC countries, and its deliberations included a Saudi proposal to cut 800,000 to 1mn barrels of per day (bpd) of oil, which was then compromised to a cut of 600,000 bpd. This cut would be on top of the existing cuts of 1.2mn bpd announced in 2019 that are now recommended to continue to the end of 2020.
Russian Energy Minister Alexander Novak, however, felt unable to agree to this. He said Rus- sia needed more time to consider the matter and weigh its impact on the market.
On Friday, Novak said global oil demand might fall by 150,000-200,000 bpd this year as a result of the virus outbreak and other negative factors. That forecast is lower than others. Novak said his estimate was “an insignificant volume, taking into account that the volatility in con- sumption also depends on many factors, such as Libya, Iran [and] Venezuela, where supply is also quite volatile”.
Others have suggested a much bigger impact. BP said a global slowdown was predicted to reduce 2020 oil demand growth by 300,000- 500,000 bpd, or up to 0.5% of total demand.
OPEC’s regular meeting is set for March 5, but there had been expectations it could hold an
emergency session with Russia and other non- OPEC allies in mid-February. An earlier meet- ing is still possible, but there has been no such announcement.
No clear way forward
The convening of the special technical meeting aroused hopes that a solution might be found, but last week’s “non-decision” suggests that there is no clear way forward.
Saudi Arabia’s oil minister, Abdulaziz bin Salman, wanted to move ahead quickly with a meeting to consider new production cuts. But he has struggled to persuade Moscow, even after his father, King Salman, made a personal call to Russian President Vladimir Putin.
The apparent conflict between OPEC and Russia has dashed hopes that the group will be able to arrest the sharp decline in prices. Mean- while, Russia’s reluctance to support the OPEC production cut may signal a potential fissure within the oil producers’ alliance.
The 13 oil-exporting nations in the cartel, and their partners in what’s called OPEC-plus, 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.
Demand shocks
Unlike recent oil tailspins, this one has been trig- gered 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. Major air- lines such as American Airlines, Air France and British Airways have suspended all flights to and from mainland China; daily flight cancellations are approaching nearly 3,000.
Meanwhile, China’s Sinopec has slashed overall crude throughput by about 13% and its refineries are operating at minimum levels. 
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w w w . N E W S B A S E . c o m Week 06 13•February•2020