Even as OPEC and Russia consider an emergency production cut, oil is tanking and the outlook for prices is getting dimmer.
West Texas Intermediate crude futures were below $50 per barrel in late trading Monday, after closing at $50.11, a decline of 23.7% from its Jan. 8 intraday high of $65.65 per barrel. WTI first fell more than 20% from that level on Jan. 27 on an intraday basis, putting it in a bear market, according to Refinitiv data. Brent crude prices plunged nearly 4% Monday and was down 24% from its January high, when it closed at $54.45 per barrel.
The Organization of Petroleum Exporting Countries, and Russia have reportedly held preliminary discussions about expanding their production cuts, in place since 2016. The joint technical committee that monitors the progress of the group’s market efforts was expected to meet this week to discuss the impact of the coronavirus on oil demand and potential action.
Oil prices were slammed Monday, as the virus continued to spread and cruise ships became a bigger concern. Japan quarantined Carnival’s Diamond Princess, after a Hong Kong man who sailed on it last month tested positive with coronavirus. The 80-year old had flown to Japan to board the ship, which had 2,666 passengers and 1,045 crew on board.
Fears the virus could impact cruise ship bookings or even curb cruises has been hanging over the travel industry, after airlines cut back on flights to China. Transportation in major Chinese cities has been shut down, and Chinese flights have been grounded.
Oil prices attempted to rally Monday on the reports OPEC might cut another 500,000 barrels on top of the current 1.8 million, but virus concerns reversed early gains.
“They’re getting run over by this demand destruction, ” said John Kilduff, partner with Again Capital. “Yet another segment of the transportation fuel demand is potentially staring down a big loss.”
Citigroup energy analysts sliced their price expectations for crude from the high $60s for Brent this year to the $50s, including an average of $54 for the first quarter and $50 for the second quarter. They said Brent could touch as low as $47. The analysts expect Brent to return to $58 by the fourth quarter and then slide to $53 in 2021.
“The depth of the impact on oil looks much deeper than we initially thought, even with a deeper OPEC+ cut, with Chinese government measures amounting to a major shutdown of the economy,” the analysts wrote. “This drives much weaker oil balances, though also an uptick from 4Q’20. Returning supply from Libya/Iran could be another bearish hit.”
The Citi analysts said China’s passenger and freight traffic could be down 70% for two or more weeks, before gradually recovering.
They said demand could fall by 1 million barrels a day in the first quarter, given the much larger size of China’s economy and oil demand now, compared to during the SARS outbreak in 2003.
“If China’s refinery runs hold up, buying US oil to meet Phase One trade deal commitments, this could boost product exports, pressuring margins and crude demand ex-China, hitting prices across the oil complex,” the Citi analysts added.
As for WTI, it slid below $50 in after hours trading. “We’re certainly going to take a trip down in the upper $40s for a time here, potentially the low $40s, but that’s as far as I’ll go. We just don’t know enough,” said Kilduff.
Even with 1 million barrels a day of Libyan oil off the market, the world is still well supplied as demand dries up. In the U.S., gasoline demand has slipped but the U.S. industry continues to see solid exports, with oil exports of about 3.5 million barrels a day.
“The cash markets have really softened up globally. Sinopec is out there looking to resell about half a dozen crude cargoes,” said Kilduff.
Jet fuel prices have cratered and are down 25% and more for the year.
RBC analysts say global flight cancellations spiked to more than 3,000 a day over the weekend. “In aggregating flight databases to track real time aviation patterns across the top five busiest Chinese airports, we found that flight activity plunged 12% over the Lunar New Year weekend, and continues to track lower, falling by a staggering 41% from normal levels,” they wrote.
The analysts noted that the coronavirus is currently a Chinese jet fuel demand story for now, and not yet a global demand story.
“The oil market has been subject to many supply shocks over recent years, but an acute demand shock has not been felt since the 2008 financial crisis. The coronavirus has roiled the oil market, alongside many other asset classes, but this epidemic is a global story, not one confined to oil market fundamentals,” the RBC analysts noted.
“These are the darkest days in the industry that I can remember in awhile,” said Kilduff.
