Why oil rebounded last week despite coronavirus doom

Why oil rebounded last week despite coronavirus doom

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Last week proved once more that markets often react on sentiment and perceived outlook rather than to cold, hard facts.

The coronavirus outbreak severely impacted oil demand, a situation underlined by forecasts released last week by both the Organization of the Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA).

The IEA downgraded its demand predictions for this year by 365,000 barrels per day (bpd) to 825,000 bpd, the lowest since 2011. It even expected oil demand to fall by 435,000 bpd during the first quarter of 2020.

OPEC’s downward revisions were less hefty. The organization predicted oil demand to grow by 990,000 bpd in 2020, which included a downward revision of 230,000 bpd.

The two reports were published amidst negative news of the coronavirus. Its impact on Chinese oil demand has been severe, reducing the run rates of refineries by as much as 3 million bpd. The impact of the virus will take 1.1 million bpd out of the market during the first quarter of this year and 344,000 bpd during the second in China – all according to the IEA.

The situation has become so grave that several suppliers are willing to discount the oil price for their eastbound cargo in order to retain market share. According to S&P Global, this mainly affected Brazil, Russia and Angola.

These numbers make sense when looking at the impact the spread of coronavirus has had on global supply chains, especially in the automotive and technology sectors. Hyundai closed factories in Korea, and Chrysler Fiat in Serbia. General Motors is worried about its production lines in the US and several factories in the UK have shortened their hours due to a lack of parts.

Apple has been particularly impacted, with several of its factories in China manufacturing parts or assembling iPhones having been slow to reopen after the lunar new year — if at all.

The outlook on the global economy is bleak. In January the International Monetary Fund (IMF) downgraded global economic growth for 2020 by 0.1 percent to 3.3 percent. That was before worries about the coronavirus emerged.

On Sunday the IMF’s managing director, Kristalina Georgieva, floated a further reduction in the growth rate by 0.1 – 0.2 percentage points. At the same time, she warned about making hasty predictions, because too little was known at this point about how the virus would develop.

Depending how the economic impact of the coronavirus unfolds, the 600,000 bpd might well do the trick and balance markets.

Cornelia Meyer

The impact of the virus is twofold, one lasting and the other one resulting in a rebound after the worst is over. The former is the loss in consumption, travel and tourism during the Chinese lunar new year, constituting a one-time hit, which cannot be recovered.

The second effect is the loss of production in the global supply chain. Industry will, over time, make up for the backlog that creates. Down the line it will probably even result in greater-than-expected demand for oil – the premier fuel for transport – because shipments will resume, and factories will need to compensate for the backlog.

So why then was there a hike in the oil price while the short-term outlook was so bleak? The development ran against what was seen in most other commodities, especially copper. Brent was up by more than $3.60 per barrel or close to 7 percent on the week. The price has dropped a little bit since then, reaching $57.39 per barrel for Brent in early Asian trading on Monday.

The answer is simple. While the short-term outlook is negative, analysts and traders pin great hopes on the upcoming meeting of OPEC+, a grouping of the OPEC member countries and their 10 allies lead by Russia.

Ministers will gather in Vienna on March 5 and 6 and most analysts expect them to follow the recommendations of a technical meeting held earlier this month, which stipulated that the grouping should cut production by an additional 600,000 bpd. That would go beyond the 1.7 million bpd by which OPEC+ reduced production in December of last year. The full 2.3 million bpd should remain off the market until June, when another meeting is scheduled.

Depending how the economic impact of the coronavirus unfolds, the 600,000 bpd might well do the trick and balance markets. There are, however, other factors that could influence developments.

For one, political and internal tensions in Libya have grinded to a halt the country’s oil exports. If the Berlin process achieves its desired results later this quarter, Libyan production, and with it exports, could resume adding to the supply glut.

Secondly, analysts will observe how OPEC+ interacts in March. Saudi Arabia wanted to bring the March meeting forward, but Russia denied the urgency. Russia has so far, many times talked tough ahead of OPEC+ meetings. In the end Moscow relented and consented to play its part in doing what was required to balance markets.

The odds are that the March meeting will be no different and that is clearly what traders anticipate. Should that not be the case, expect the price of oil to slide after March 6.

• Cornelia Meyer is a business consultant, macroeconomist and energy expert. Twitter: @MeyerResources

Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point-of-view

Singapore Airlines to cut flights as coronavirus epidemic hits demand

Besides visitors to the city-state, Singapore Airlines relies heavily on transit traffic. (Reuters)
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Updated 18 February 2020

Singapore Airlines to cut flights as coronavirus epidemic hits demand

  • Affected destinations include Frankfurt, Jakarta, London, Los Angeles, Mumbai, Paris, Seoul, Sydney and Tokyo
  • Rival Cathay Pacific Airways has said it is cutting 40 percent of capacity across its network

SYDNEY: Singapore Airlines will temporarily cut flights across its global network in the three months to May, it said on Tuesday, as a coronavirus epidemic hits demand for services to the Asian city state, as well as through the key transit hub.
Key affected destinations include Frankfurt, Jakarta, London, Los Angeles, Mumbai, Paris, Seoul, Sydney and Tokyo, the airline said on its website.
“Singapore Airlines and SilkAir will temporarily reduce services across our network due to weak demand as a result of the Covid-19 outbreak,” the carrier said.
“We will continue to monitor the situation and make further adjustments as necessary.”
It declined to say what percentage of capacity it had cut in response to a query from Reuters, citing commercial sensitivity.


This section contains relevant reference points, placed in (Opinion field)

The cuts follow major reductions already announced in services to mainland China and Hong Kong. In the Dec. quarter, flights to mainland China made up 11 percent of capacity for the airline, and more than that for budget arm Scoot.
“It’s not a surprise to see some cuts in flights, given the weak forward bookings that can be expected from the current environment,” said DBS analyst Paul Yong.
Demand on flights to South Korea and Japan had been hit hardest after China, Yong quoted Singapore Airlines’ management team as having told analysts at a results briefing on Monday.
Those were the areas of the biggest cutbacks in Tuesday’s announcement.
Singapore’s tally of 77 cases of the virus is one of the highest outside mainland China, where more than 1,800 people have been killed in the epidemic.
Last week, the Asian tourism and travel hub said it expected visitor numbers to drop by a quarter or more this year, hit by the virus outbreak.
Besides visitors to the city-state, Singapore Airlines also relies heavily on transit traffic. Premium travel has suffered after many business events were canceled across Asia because of the virus.
Hong Kong-based rival Cathay Pacific Airways has said it is cutting 40 percent of capacity across its network, up from 30 percent earlier, due to weak demand.

Saudi Arabia pumps 12m barrels of oil for the first time

Updated 02 April 2020

Saudi Arabia pumps 12m barrels of oil for the first time

  • Daily record smashed amid market turmoil
  • Previous record output was about 11 million barrels

DUBAI: Saudi Arabia pumped more than 12 million barrels of oil on Wednesday for the first time in its history.

The Kingdom has vowed to ramp up production as an oil “price war” shakes the global energy industry following the end of a supply agreement with other producers.

Officials at Saudi Aramco, the world’s biggest oil company, and the Saudi Ministry of Energy, Industry and Mineral Resources told Arab News that crude output on the first day of April — when the OPEC+ agreement to limit supply lapsed — was more than 12 million barrels. Some reports put it at 12.3 million.

The Kingdom’s previous record output was about 11 million barrels, achieved only briefly.

SPOTLIGHT: From Middle East to USA, coronavirus impact transforms oil industry’s dynamics

Aramco had pledged to increase its maximum sustainable capacity (MSC) — the level at which it can safely maintain long-term output — to 12.3 million in the coming months; that it has already hit this level is regarded as a measure of its operational efficiency and the Kingdom’s determination to win the battle for market share.

The company released a short video showing laden oil tankers sailing away from Saudi ports. It said it had loaded 18.8 million barrels onto 15 tankers, which would have taken about three days.

Aramco’s strategy of large output increases and significant discounts to customers — labeled a “shock and awe” play by energy experts — has transformed the oil industry. The price of crude oil plunged as demand for energy was hit by the coronavirus pandemic. Some producers, especially in the US where extraction costs are high, are facing financial disaster.

“If Saudi Arabia sustains this, it would be an unprecedented demonstration of their MSC,” said Robin Mills, chief executive of the Qamar energy consultancy. “Assuming that it is production, and not just drawing down on storage, it’s an impressively quick ramp-up.”


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It was also notable that production was unaffected by any lingering issues from terrorist attacks last September on Aramco facilities at Abqaiq and Khurais, Mills said.

Despite the flood of oil onto global markets, the Brent crude global benchmark price rose by about 10 per cent toward $25 per barrel after US President Donald Trump said he thought the price was too low, and offered talks with Saudi Arabia and Russia about the global oil glut.

Shares in Saudi Aramco rose for a third consecutive day, up 1.5 per cent to SR30.6.