Oil Jumps On Sudden Confidence of OPEC Alleviating Impact of Coronavirus

Meanwhile, John Kemp estimates the total demand loss for China at 450,000 bpd: File Image/PixaBay

Considering crude analysts earlier this week expressed widespread doubt that the Organization of the Petroleum Exporting Countries (OPEC) could counter the negative impact of China's coronavirus, it came as a surprise on Wednesday that a potential OPEC production cut was credited for buoying the spirits of traders and causing futures to climb 2.3 percent in New York.

Even more surprising was that crude rebounded despite news from the Energy Information Administration that U.S. inventories posted a bigger-than-expected rise - although gasoline experienced its first draw in 12 weeks.

West Texas Intermediate on Wednesday gained $1.14 to settle at $50.75 per barrel, while Brent rose $1.32 to close at $55.28.

Reportedly, a panel of experts from OPEC have been studying the ramifications of the coronavirus, as Saudi Arabia calls for deepens oil production cuts and Russia favours an extension of the current cutback deal.

But even though nothing has been decided and OPEC's efficacy was questioned earlier this week, John Zanner, senior strategist at Uplift Energy Strategy, said, "There's a lot of optimism in the market from OPEC showing they're willing to play ball; OPEC also has to balance supply disruptions from Venezuela to Libya and getting Russia to come on board, but the current optimism has some runway."

For his part, John Kemp, commodities analyst for Reuters, examined historical trends to roughly determine the duration of viral epidemics, and on Wednesday he noted that "Most uncontrolled outbreaks have lasted roughly three months."

He added that "Like the course of the epidemic, the economic impact tends to be acute rather than lasting, compressed into the space of a few weeks or months."

With this in mind, Kemp speculated that "In the current outbreak, the principal impact on China's oil consumption is likely to be concentrated in the first quarter of the year, especially in January and February.

"By March and April, the number of new cases and fatalities should start to decline, and more normal business activity and oil consumption should gradually be restored."

Kemp was equally methodical in his estimation of losses due to the coronvirus and wrote that if it "depresses China's consumption by 10 percent on average in the first quarter, 2 percent in the second quarter and 1 percent in the third, the total impact will be the loss of around 450,000 barrels per day on average in 2020."