OPEC is meeting Tuesday while Fitch Ratings says market could enter surplus
The human impact aside, markets are fearful of how the global economy may be weakened by the continuing spread of the coronavirus outbreak.
The Wall Street Journal’s headline Monday highlighted China’s closure to the world noting that “rarely has such an integral part of multinational industry and trade faced such an abrupt and open-ended freeze out.”
The oil markets are vulnerable to China’s crisis and were already concerned about weakness in the world’s second largest economy and how that would impact oil demand.
OPEC+ is holding an urgent meeting Tuesday to discuss how to react to the situation. This follows prices falling below $50 a barrel Monday and may lead to the group making further production cuts to support the market. The price recovered to around $51 overnight.
It’s estimated that China’s oil demand has already reduced by 20% with refineries and factories closing or in quarantine.
China accounts for about 15% of global oil consumption and is the main driver of global demand growth. Its contribution to global consumption growth averaged 36% over the past five years and should have been close to 40% in 2020, according to the US Energy Information Administration (EIA)
“We believe the OPEC+ will announce an additional production cut of at least 500,000 barrels per day,” UBS Group AG analyst Giovanni Staunovo wrote in a report. “With Brent now trading below $60 a barrel, we expect the group to speak with a single voice again.”
The current challenges for the market come as Canada’s oil industry was set for a stronger year in 2020.
Oil surplus?
Meanwhile, Fitch Ratings says that a continued slowdown in demand could see global oil supplies enter an extended production surplus as supplies continue to rise in Brazil, Norway, and the US.
The firm says the size of the surplus will depend on the reaction by OPEC+ and the duration of the coronavirus outbreak. Fitch says that Chinese demand for imported oil may take some time even after the virus deteriorates due to a build-up in its inventories.
However, the virus is not the only factor in play with forecasts already calling for a well-supplied market in 2020 even before the outbreak.
“We expect oil prices to remain highly volatile in 2020, with geopolitical tensions and economic sentiment being other key drivers,” Fitch said.
