Oil Prices A Casualty As Coronavirus Spreads

By Eva Brocklehurst | More Articles by Eva Brocklehurst

OPEC (Organisation of Petroleum Exporting Companies) and the Russians appear to be parting company, having failed to agree to further production cuts. This comes as coronavirus impacts industrial production across the globe and severely affects the transportation sector.

Amid travel restrictions being imposed by various governments and the number of cases rising, the fall-out on the global economy is continually being reassessed – downward. The end result is the probability that oil prices will come under further pressure.

Russia has rejected the ultimatum from the oil cartel for an output cut of -1.5m b/d (barrels per day). Moreover, the current production agreement which expires at the end of March was not extended.

ANZ analysts suspect the likelihood OPEC members will raise production is relatively high.

Saudi Arabia is the key, as it warned production cuts will not occur without Russia’s involvement. Saudi Aramco has already cut prices for crude sales into foreign markets and appears willing to endure low prices.

The globe’s biggest oil producer can produce oil relatively cheaply, at a cost below US$20/bbl, but its reliance on oil revenue to fund government expenditure means the break-even price is above the cost of production.

The International Monetary Fund calculates Saudi Arabia needs a price of US$83.60/bbl to balance its budget. Saudi Arabia could opt for volume over value, and the analysts suspect output will rise to above 10m b/d in April if an OPEC deal is not reached in coming weeks.

China GDP

The analysts calculate that, amid the disruption to industrial activity and travel, China’s GDP growth will slump to 4.1% in 2020, and the hit to demand for oil will be around -1.6m b/d as coronavirus spreads around the world.

Their current estimate of a 300,000 b/d oil surplus was based on assumptions that the OPEC plus Russia agreement to cut production would be extended to the end of 2020. Hence, the analysts suggest this will blow out if OPEC production rises quickly.

There is no doubt oil prices will be under pressure as the market assesses the impact of a supply and demand shock of this magnitude and prices could test levels not seen since 2016, the analysts suggests.

Then the question will be how long prices remain at those levels. Unless OPEC can resurrect a production agreement the ANZ analysts suspect a “long and painful period of low oil prices“.

About Eva Brocklehurst

Eva Brocklehurst started her journalistic career in 1993 as a financial reporter with RWE Australian Business News covering money markets and economic reports. She moved to Australian Associated Press (AAP) in 1998 as a senior financial journalist to cover money markets, economic analysis, Reserve Bank and Treasury. Eva became deputy finance editor at AAP in 2003. Started working online as a reporter on ASX-listed companies for RWE Australian Business News in 2005. Eva joined FNArena in 2012 and has been covering stockbroker analysis of ASX-listed companies since, as well as writing general news stories.

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