Oil Down Again on Coronavirus Fears, Possibility Of OPEC Not Making Deeper Cuts

Meanwhile, short selling of oil is rampant: File Image/PixaBay

From worries about crude oversupply to fear of shortages and back to oversupply concerns: that was the recent pattern of erratic trading that became evident on Friday as crude demand worries in the midst of China's coronavirus were again cited as the reason for traders causing the commodity to suddenly drop over 1 percent.

The latest signs of infections outside the Hubei province epicentre in China resulted in Brent dropping 1.4 percent at $58.46 per barrel, while West Texas Intermediate dropped 0.9 percent at $53.38 per barrel.

The losses were exacerbated by reports that U.S. business activity in the manufacturing and services sectors stalled in February, as well as Alexander Novak, energy minister for Russia, stating on Thursday that it no longer made sense to meet prior to an Organization of the Petroleum Exporting Countries (OPEC) summit in March - which analysts took to mean that the cartel may not add to existing supply cuts.

However, both benchmarks achieved their second consecutive weekly rise: Brent up 1.8 percent for the week and U.S. crude rising 2.3 percent.

Jan Stuart, global energy economist at Cornerstone Macro, summarized Friday's trading activity by noting that "Just when the outbreak was beginning to turn, the new cases are making investors wonder if we have more to worry about; [but] there was no move in the structure however, the backwardation in Brent held."

Ole Hansen, head of commodity strategy at Saxo Bank, remarked, "We have to acknowledge that we're dealing with the biggest demand shock since the financial crisis...Until we see China getting back to work, the virus will be the main focus."

Indeed, China's problems are influencing the crude market significantly: Bloomberg on Friday reported that bets against West Texas Intermediate crude increased by 11 percent to the highest in four months during the week ended February 18, which puts  oil short-selling at more than triple the level at the start of the year.

Mark Waggoner, president of Excel Futures, said, "Everyone is still trying to figure out what's going to happen with the coronavirus; under normal circumstances they would be buying, but there are fears the virus could expand."