Coronavirus epidemic keeps world oil prices down / News / News agency Inforos
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Coronavirus epidemic keeps world oil prices down

But this is not a long-term scenario

Coronavirus epidemic keeps world oil prices down
Context:

Since the beginning of the year, the global "black gold" market has entered a phase of rapid decline: while early in January a Brent barrel cost almost $70, by the end of the month it was already approaching $57. In the first decade of February, the decline continued, with the barrel cost falling below $55 and the reason being the continued spread of the coronavirus and news of its mutations. The blockade of the infection center – the Chinese metropolis of Wuhan – has proven a delayed reaction, with dozens of infected people found outside of China, in many countries of the world. The epidemic provokes negative assessments of global economy prospects.

We can but hope that that the coronavirus outbreak will be a local event with no strategic impact on the world economy. The recovery in oil demand is likely to be as rapid as the January-February drawdown. The World Health Organization (WHO), by the way, does not yet classify the coronavirus outbreak as a pandemic but describes the current situation as an emergency.

Meanwhile, bifurcations in the energy market, provoked by news of an overwhelming coronavirus threat, are successfully practiced primarily by major stock venture capitals. Global investment groups involved in energy exchange business may benefit from non-linear trading venue scenarios – their underlying profit is brought about by deep oil price drawdowns that sooner or later will be replaced by growth.

World oil producers are certainly concerned about the slump in black gold prices. The Organization of Petroleum Exporting Countries (OPEC) has already allowed an emergency meeting to be held because of the steep drop in oil prices. The meeting, originally scheduled for March, may take place earlier. Delegates of the OPEC+ Technical Committee estimated this year's oil demand slowdown at 200,000 barrels per day, if the Wuhan virus situation unwinds under the worst-case scenario.

The leaders of Chinese energy enterprises are alarmed and predict a 25% oil consumption decrease in China in February, as the coronavirus situation puts bounds to the transportation segment and slows down industrial production. The capacity of China's key oil refineries is all-time low.

On February 6, a number of agencies, including Bloomberg, reported a recommendation from the OPEC+ Technical Committee to further reduce oil production by 600, 000 barrels per day by June. Russia, according to its Energy Minister Alexander Novak, has yet to decide on additional limits. He also emphasized the necessity to keep monitoring the oil prices climate.

In fact, OPEC+ still has reason to hold off on additional oil production limits – after all, the coronavirus hysteria may soon fade away. In days past, the world has faced outbreaks of "avian" and "swine" flu in China, and the global economy has not collapsed because of them. Also, back in those days, no direct impact of the epidemics on the cost of energy resources has been found.

Essentially, there are no incentives for the Brent oil to approach the $50 mark, as widespread concern over the Wuhan virus's influence is suppressed by news about the epidemic's slowdown and about progress expectations in its treatment.

The OPEC+ alliance has demonstrated its ultimate vigilance and prompt monitoring, as well as the ability to effectively react to the reference level of oil prices for oil exporters if necessary – it is just about $50 per Brent barrel.

At that, the cost of a reference fuel barrel is likely to get back to the level of $60 or higher in the nearest future, even without new OPEC+ decisions on limits. Over the recent weeks, Libya has been reported to almost completely leave the market as an oil supplier due to the blockade of ports. And the United States has announced an upcoming tightening of sanctions against Venezuela's oil sector. These are powerful arguments in favor of encouraging the barrel's market value.

A long-term view of the global oil market is also relevant here: for instance, late January saw the US Department of Energy release a strategic scenario for the oil market development – and by 2050, the barrel will probably cost over $180. The reason for this growth is high production costs and low availability of resources. Even the Department's baseline forecast points to $105 per barrel. Long-term oil market assessments reasonably leave out such local force majeure circumstances as viral epidemic outbreaks, with their real threat to the world economy being really exaggerated sometimes.

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