Oil prices fell to the lowest in more than a year overnight as the coronavirus outbreak curtailed Chinese demand and sparked potential supply cuts by OPEC and its allies.
Brent crude was down $US1.40, or 2.5 per cent at $US55.22 a barrel, its lowest since January last year.
US West Texas Intermediate (WTI) crude fell 83 cents a barrel to $US50.73 after earlier touching a session low of $US49.92, also the lowest since January 2019.
“We have not seen a demand destruction event of this scale that moves this quickly,” said Phil Flynn, analyst at Price Futures Group in Chicago.
As the outbreak hits fuel demand in China, the world’s biggest crude oil importer, refiner Sinopec Corp told its facilities to cut throughput this month by about 600,000 barrels per day (bpd), or 12 per cent, the steepest cut in more than a decade.
Independent refineries in Shandong province, which collectively import about a fifth of China’s crude, cut output by 30 per cent to 50 per cent in a little more than a week, executives and analysts said.
The outbreak could particularly curtail jet fuel demand growth in China, wrote analyst Paul Sankey, managing director at Mizuho in New York. Wuhan airport is China’s busiest inland hub carrying about 25 million passengers per year, and conservative estimates are that the number of travelers have fallen by about a third, Sankey said.
The Organization of the Petroleum Exporting Countries (OPEC) and its allies, a group known as OPEC+, are considering a further 500,000 bpd cut to their oil output, three OPEC sources and an industry source told Reuters.
The Wall Street Journal reported that another option being considered would involve a temporary cut of 1 million bpd by Saudi Arabia to jolt oil markets.
“The market needs assurances that the supply/demand equation remains in balance for prices to hit a floor. This suggests a commitment from OPEC not just to extend oil supply cuts, but even implement deeper ones beyond March,” said FXTM analyst Hussein Sayed.
Iranian Oil Minister Bijan Zanganeh said the oil market is under pressure with prices dropping below $US60 a barrel, and “efforts must be made to balance it.”
Ratings agency Fitch on Monday said the coronavirus outbreak could push the global oil market into surplus and that OPEC+ may need to cut production further if the outbreak lasts for several months.
On the first day of trade in China since the Lunar New Year holiday, investors erased $US393 billion from the nation’s benchmark equities index, sold the yuan currency and dumped commodities as coronavirus fears dominated markets.
The first-month Brent contract traded at 8 cents less than the second-month contract , a reversal from the front-month premiums seen as recently as last week. The discount briefly widened to 12 cents, the largest since July.
“There’s an expectation that it’s not going to last, but we’re oversupplied in the near term,” said John Kilduff, a partner at Again Capital in New York.
The US crude’s discount to Brent narrowed to as little as $US4.32 a barrel, the least since September. Brent values dropped more precipitously than US crude because China is the top destination for crude that is priced relative to Brent, said Kilduff.