Oil sank again as OPEC+ backed away from an emergency meeting.
OPEC’s Joint Technical Committee (JTC) recommended extending the current production cuts through the end of the year while adding an additional 600,000 bpd in reductions.
Russia hesitated last week, before signaling some support for additional cuts. Still, nothing has yet been confirmed or approved. OPEC+ had raised expectations of an emergency meeting, rumored to take place as soon as this week, but now it looks like nothing will occur before the previously scheduled meeting in March.
Nevertheless, the odds of deeper cuts materializing remain relatively high. But oil traders do not seem to care. The announced decision by OPEC’s JTC to recommend further action has done nothing for oil prices. WTI dipped below $50 per barrel on Monday.
Meanwhile, warring factions in Libya have resumed negotiations in Geneva, which could lead to a restart of oil flows. “Over 1 million barrels of additional oil per day from Libya could possibly push the Brent price towards the $50 per barrel mark in the short term,” Commerzbank wrote in a note on Monday. “That said, we expect the oil price to stabilise in the medium term if OPEC+ agrees on the additional production cuts.”
Others were more bullish. JBC Energy noted that Chinese oil demand has “collapsed,” but that the effect could be temporary. Because of that, additional cuts from OPEC+, and the extension of the agreement through the end of 2020, could over-tighten the market. “Although this can still change if there are signs that attempts to curb the spread of the disease are failing, and potentially further largescale quarantines are implemented, if the recommendations of the JTC are adopted and carried through, we risk a return to the extremely tight physical crude picture we have only recently left behind,” JBC Energy wrote in a report. Moreover, any cuts taken in March will take several weeks before they materialize in the market, which, again, could occur after the worst of the coronavirus has already passed.
Meanwhile, it isn’t just oil dragged down into a bear market. The crisis for gas is arguably worse.
On Monday, Nymex prices for March delivery fell below $1.80/MMBtu, a price that is ravaging the U.S. shale gas industry. But the gas glut is not just isolated to the U.S. – it is now a global phenomenon. LNG prices have fallen below $3/MMBtu in Asia. In Europe, gas inventories are extraordinarily high for the time of year.
China’s Cnooc is trying to wriggle out of LNG purchasing agreements, declaring force majeure on several LNG cargoes late last week. LNG suppliers, including Shell and Total SA, rejected the declaration.
“With demand plunging, our tanks are topping. And workers are getting exhausted waiting for colleagues to return from holiday to relieve them,” an executive at an LNG terminal in northern China told Reuters.
The market for LNG was “already weak,” according to Ira Joseph, global head of power and gas analytics at S&P Global Platts. The coronavirus could keep JKM prices (spot LNG in Asia) at $3/MMBtu for longer.
“Honestly speaking, if I have one wish for free, please send me an ice blizzard for the gas prices,” Rainer Seele, CEO of Austrian energy company OMV, said on CNBC last week.
The hit to the global economy from the outbreak will exceed that of SARS in 2003, according to IHS Markit. China was a much smaller economy at the start of the century. Now China is the world’s second-largest economy and its largest source of growth – China accounted for nearly 40 percent of global growth last year.
“The concern remains that the wider markets have yet to reflect the full impact of the disruption,” said Saxo Bank commodity strategist Ole Hansen, according to Reuters.
“With China being the world’s most dominant consumer of raw materials, the impact continues to be felt strongly across key commodities and the world is facing the biggest demand shock since the 2009 global financial crisis.”