Opec and its allies are preparing emergency cuts in oil production after the crude price entered a bear market, driven lower by the impact of the coronavirus outbreak on demand in China.
Brent crude, the international benchmark, fell on Monday to as low as $54.17 a barrel, down more than 4 per cent to its weakest level in more than a year and taking losses to more than 20 per cent since early January — the definition of a bear market.
The so-called Opec+ group, which includes the core members of the oil producers’ cartel and allies like Russia, is considering its response. The group fears prices will keep slipping unless it takes action to stem the fall.
In a statement on Monday evening, the Kremlin said that president Vladimir Putin had taken a call from Saudi Arabia’s King Salman, and that both sides stood ready “to further co-ordinate their actions . . . to ensure stability on the global oil market.”
The oil price has been hard hit by the viral outbreak as traders fear that the closure of major cities and flight routes in China will lead to a direct hit on consumption. The country is second only to the US in oil use.
Opec+ nations are due to assess the situation at technical meetings on Tuesday and Wednesday. Talks will focus on whether removing 500,000 barrels a day of output will be enough to prop up the market, according to people briefed on the discussions. The core Opec group pumped about 29.4m b/d in December, a number that probably slipped in January after the loss of around 1m b/d from Libya.
No deal has yet been agreed. Some members think more time is needed to understand the full impact of the virus on demand, according to those people briefed. Ministers for the countries were originally due to meet in early March but are now expected to convene later this month.
Any cuts would add to those negotiated in December, when the oil producers agreed to remove a further 500,000 b/d until July, taking total production cuts to around 1.7m b/d, or just under 2 per cent of global demand.
Analysts at Citi said that demand for oil could be reduced by more than 1m b/d in the first three months of 2020 because of coronavirus, which would amount to a larger hit to the market than Sars in 2003. The bank has cut its price forecast for the second quarter by $18 to just $50 a barrel.
The structure of the Brent market has also weakened dramatically in recent days. On Monday it moved into contango — where contracts for delivery in the near future start trading at a discount to those for delivery in later months, because of the softness of demand.
Parts of China are entering a near-total lockdown in an attempt to prevent the transmission of the deadly virus. Authorities have imposed a travel ban on over 40m people, while retailers such as Apple have closed stores in the country.
The threat to demand has come at a bad time for an oil industry already pressured by investors to do more to tackle climate change. ExxonMobil, which reported weaker-than-expected annual results on Friday, was downgraded by a number of banks after the figures. Goldman Sachs moved the company to “sell” with a target price of $59 a share, down from $72 previously.
Olivier Jakob at consultancy Petromatrix said the full effects of the virus on China would become clear only after the extended new year holiday. “Early on, the estimates were just focusing on airport transport demand,” Mr Jakob said. “But the true risk is lower economic activity. That’s much bigger in scale.”
Prices for liquefied natural gas have also fallen dramatically. The key marker for Japan and Korea, known as JKM, fell to a record low of $3.512 per million British thermal units on Monday, according to S&P Global Platts, a price assessment agency.