Crude oil’s week-long collapse continued with Brent crude oil falling to a 32-month low below $50/b. While copper, which has now settled into a range, derives half of its demand from China, the energy sector reflects development across the global economy. The spreading of the coronavirus from China is posing an increased threat to global growth and fuel demand has taken a hit as companies ban travel and supply chains are disrupted.
Faced with the biggest demand shock since the global financial crisis, the OPEC+ group of producers met in Vienna to hammer out a response to the current collapse in demand. Talks about a 1.5 million barrel/day cut ran into problems with Russia balking at the decision, instead saying they would rather wait until June in order to gauge the impact. Not only on demand but also the potential for a slowdown among other producers, not least from U.S. shale oil plays.
Before the virus became known outside China in mid-January, OPEC, the U.S. Energy Administration and the International Energy Agency expected global demand growth in 2020 would rise by an average 1.2 million barrels/day. With this forecast in mind, together with the prospect of non-OPEC production rising by 2.3 million barrels/day growth, the OPEC+ group of producers made the early December decision to cut production to balance the market.
With demand growth now being revised lower to flat and by some to negative, the gap between supply and demand has now potentially risen by more than a million barrels/day. Hence the urgent need for OPEC+ to make another deep cut, with failure to do so carrying the risk of seeing oil plummet towards the low 40’s.
Non-OPEC production, especially from U.S. shale oil, is likely to suffer a slowdown as well due to lower prices and tighter credit conditions. It may, however, still take months before the impact is being felt and time is really not what OPEC has given the ongoing and potentially worsening demand shock.
Forty or sixty dollar Brent crude oil is a question that the OPEC+ group of producers hold the key to. The answer to that question was given after finishing writing this update.