One analyst believes oil demand is headed toward contraction: File Image/PixaBay
Except for a few hiccups in earlier sessions, oil prices have maintained a consistent downward trajectory in February, and on Monday they hit 13 month lows when Brent fell $1.20 to settle at $53.27 per barrel (its lowest close since December 28, 2018) and West Texas Intermediate fell 75 cents to settle at $49.57 (the lowest close since January 7, 2019).
The losses were again in response to the coronavirus health crisis, "which has brought China's transport and manufacturing sectors to a virtual standstill," according to analysts at Eurasia Group.
Adding to the concern of crude traders was Alexander Novak, energy minister for Russia, who on Monday stated that Moscow needed more time to assess how the virus is impacting the global economy before committing to deeper output cuts called for by the Organization of the Petroleum Exporting Countries (OPEC).
Warren Pies, analyst, Ned Davis Research
Outright demand contraction is now on the table
Edward Moya, senior market analyst at OANDA, stated in a report, "The lack of enthusiasm from the Russians to deliver an additional 600,000 barrels per day (bpd) in deeper production cuts could prove (costly) in stabilizing prices in the short-term."
Plus, other analysts have pointed out that the proposed 600,000 bpd cut won't match the 940,000 bpd throughout cut that China's state refiners say they will undertake this month.
From a transaction point of view, worry over the virus has caused portfolio managers to sell a total of 367 million barrels of petroleum since January 7, "reversing a large amount of the 533 million barrels bought during the previous 13 weeks," according to John Kemp, commodities analyst for Reuters.
Kemp added that "Selling has been concentrated in crude and the middle distillates used heavily in manufacturing and transportation, including aviation and shipping, the sectors most exposed to China's economy and the coronavirus."
However, he went on to speculate that if the virus can be contained, "the coronavirus-induced recession could be very short, albeit severe, and localized mostly in China, though with impacts on the country's supply chain."
But as with all fear-driven situations, the virus is inspiring a host of conflicting opinions: Warren Pies, analyst for Ned Davis Research, said on Monday that China reducing its crude demand by 2 million to 3 million bpd means "the oil market is looking down the barrel at no demand growth for the calendar year, and outright demand contraction is now on the table."