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A $30 Oil Price Is the Real Virus Threat to OPEC

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(Bloomberg Opinion) — It’s finally upon us. The week when ministers from the oil producing countries of OPEC and their allies meet to decide on the future of their latest round of output cuts. Having failed to persuade Russia to bring the meeting forward, Saudi Arabia will now hope to convince its biggest non-OPEC ally of the need to make deeper cuts in the face of a demand slump triggered by the Covid-19 virus. Success is not a foregone conclusion and failure will be costly.

The looming pandemic has already made its mark on oil markets. U.S. West Texas Intermediate crude is now firmly below $50 a barrel and global benchmark Brent briefly followed it on Friday. That is uncomfortable territory for producers everywhere and, without a clear indication of deeper output cuts from this week’s meetings, prices will fall further.

As the virus spreads, locking down Italy’s industrial heartland and prompting Switzerland to ban large gatherings, producers appear to be clinging to overly optimistic demand assessments. OPEC Secretary General Mohammad Barkindo, speaking at a conference in Saudi Arabia last week, said that in spite of the new coronavirus, the world’s “thirst for energy will continue to grow.”  While that may be true for energy as a whole, it may not be for oil demand this year if there isn’t a quick rebound.

Assessments from the three main forecasting agencies still show 2020 oil demand growth running close to a million barrels a day, but that now looks very optimistic. By contrast, veteran energy consultants FGE cut their forecast for growth this year to “almost zero.”

They base their pessimism on the ripple effects of the virus beyond China, where traffic volumes in affected cities have already slumped, according to data from the TomTom Traffic Index. Measured in terms of how much longer journeys take than they would on empty roads, live data show that traffic volumes in Beijing are still well below normal levels, even as the city is reportedly returning to work.

In Wuhan, center of the epidemic in China, there is no such uptick; economic activity remains severely curtailed.

But this is no longer just a Chinese problem. The economic impact of the spread of the virus to other parts of the world is clear. Four-week average jet fuel demand in the U.S. has dropped by 18% in the past 10 weeks. Airlines are cutting flight schedules and passenger numbers have collapsed. An acquaintance of mine flew back from Australia last weekend on a plane he reckons was only about one-third full. As people have second thoughts about getting on flights if there’s no guarantee those around them aren’t infected, flight schedules will almost certainly be cut further, with obvious implications for fuel demand. Consultants JBC Energy have cut global demand growth for the fuel to just 50,000 barrels a day this year, little more than a third of what they saw a month ago.

And those TomTom figures show the impact of the virus on traffic in Milan after its discovery in northern Italy. Morning rush-hour journey times have been cut by a quarter, as fewer cars clog the roads.

A similar pattern is emerging in OPEC nation Kuwait, where the virus has spread from neighboring Iran.

Any hopes that demand will rebound last this year in a robust enough way to offset the first-half slump are built on shaky foundations. The flights that have been cancelled are gone, not postponed. The road trips not made this week won’t be made up in future weeks. Traffic may return to normal levels once the virus is brought under control, but there won’t be a surge beyond that from pent-up demand.

This is the situation that will face the oil ministers of the 23 nations in OPEC+ later this week. They need a credible plan that will take actual barrels off the market, even if Russia balks at making further cuts. Its compliance has been poor, but Saudi Arabia seems willing to accept that in return for the perception of added clout that it thinks Russia’s presence at the table brings.

I have no doubt that an agreement will be hammered out in Vienna — or via a virtual meeting if the gathering is cancelled. (There are no signs yet that it will be, though OPEC continues to monitor the situation in Vienna). The cost of failure is too great. It “would leave the market vulnerable to a short-term swing below $30 a barrel,” analysts Emily Ashford and Paul Horsnell from Standard Chartered said in a report.

Oil traders will remain hard to convince that producers are doing enough, or reacting quickly enough. Saudi Arabia’s oil supplies to China are set to fall by a third in March as demand withers. The kingdom is pressing OPEC+ producers to agree to collective production cut of an additional 1 million barrels a day — even that may no longer be enough.


12 Comments on "A $30 Oil Price Is the Real Virus Threat to OPEC"

  1. dissident on Sun, 1st Mar 2020 1:11 pm 

    The real threat to the US and its NATO allies is exactly cheap oil prices. Anything that delays dealing with the problem of cheap oil supply in the near term just makes the shock transition in the future that more painful.

    Oil prices are set by futures speculators who use irrelevant metrics such as US gasoline stocks to gauge the supply of oil. In other words, oil prices have nothing to do with reality. The currently grossly below real oil price induces more oil consumption. As with the cod fishery, everyone thinks the supply is there when it is in the process of collapsing. But unlike with cod, we don’t have a substitute for oil and world economy cannot “funge” it.

  2. wildbourgman on Sun, 1st Mar 2020 7:27 pm 

    If oil prices slip this far or stay at current levels too long I as well as many others will be out of a job.

    Now on the bright side the shale miracle came about from cheap money and inflation. I think the federal reserve and central banks will create both of those again soon so can lightning strike twice?

  3. Outcast_Searcher on Mon, 2nd Mar 2020 2:58 am 

    dissident: Why do you think you know better than the markets what the real price of oil should be? Why do you think we’re about out of oil (as the doomers keep saying), yet the IEA and EIA say we’re just fine for 20 or 30 or more years?

    And the transition to EV’s over the next few decades will only help oil last longer.

  4. Zeke Putnam on Mon, 2nd Mar 2020 8:37 am 

    The “doomers” are not saying “we’re about to run out of oil” What they are saying is peak production and that’s NOT running out of oil. Cheap oil is not good for producers or the public. The shale folks are in real trouble with cheap oil and 41 billion of debt coming due in 2020 coupled with investors finally understanding shale is losing proposition financially.

  5. Sissyfuss on Mon, 2nd Mar 2020 8:58 am 

    The markets are up, all is well. Go back to consuming mindlessly.

  6. Abraham van Helsing on Tue, 3rd Mar 2020 5:36 am 

    “No time to die”, really?

    “Licence to kill… germs: Bond fans beg studios in open letter to delay No Time To Die release over coronavirus fears as outbreak puts Albert Hall premiere in doubt after Asia tour is cancelled”

    “How Japan stands to lose £11 BILLION if the Olympics is cancelled due to coronavirus, while private firms will lose an additional £6.4bn”

    Gonna be a nice sight: 100 m sprint with all 8 athletes wearing a mouth cap in an empty stadium.

  7. peakyeast on Tue, 3rd Mar 2020 6:39 am 

    We have had peak production of conventional oil. And look what that has done. Price is not 20$/barrel anymore. Now 60$ is low. Also the whole world is having negative interest rates to keep the economies from collapsing.

    The only surprise is that almost nobody understands that Peak conventional oil is a big contributor to the ridiculous state of the world economy.

  8. Abraham van Helsing on Tue, 3rd Mar 2020 6:59 am 

    China hopes/expects to have Corona under control by the end of April:

  9. REAL Green on Tue, 3rd Mar 2020 7:16 am 

    “Gonna be a nice sight: 100 m sprint with all 8 athletes wearing a mouth cap in an empty stadium.”


  10. Davy on Tue, 3rd Mar 2020 7:25 am 

    “China Warns Of Looming “Locust Invasion” As Coronavirus Outbreak Fades” zero hedg The locusts are reportedly approaching China via Pakistan and India. Swarms could enter Tibet from Pakistan and India, or the southwestern province of Yunnan through Myanmar, depending on climate conditions, the notice said. Swarms could also fly across Kazakhstan and into China’s Xinjiang region, according to Reuters. Thankfully, as we mentioned above, Beijing has a secret weapon: Army of 100,000 ducks recruited to fight locust plague.”

    Peking Ducks. LOL!

  11. REAL Green on Tue, 3rd Mar 2020 7:28 am 

    You so funny Davy!


  12. Abraham van Helsing on Wed, 4th Mar 2020 4:42 pm 

    How Corona really feels like, diary from a Brit in Wuhan:

    “What it’s REALLY like to catch coronavirus: First British victim, 25, describes how ‘worst disease he ever had’ left him sweating, shivering, and struggling to breath as his eyes burned and bones ached”

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