Oil prices fell 4 per cent overnight with renewed weakness in the stock market after the World Health Organisation said the global coronavirus outbreak is now a pandemic, and as major oil producers announced plans to escalate the burgeoning price war.
Brent crude settled down $US1.43, or 3.8 per cent, at $US35.79 per barrel, while US West Texas Intermediate crude ended down $US1.38 or four per cent at $US32.98.
Risk assets tumbled throughout the day, but accelerated losses late as the number of coronavirus cases increased and numerous countries restricted travel.
“What caused the dump in oil prices in the last minutes before the oil market close was when the stock market made new lows,” said Phil Flynn, analyst at Price Futures Group in Chicago. “News on the coronavirus does not seem to be inspiring demand hopes right now.”
Both the Organisation of the Petroleum Exporting Countries and the US Energy Information Administration slashed oil demand forecasts because of the coronavirus outbreak, as they now see demand contracting in this quarter.
Saudi Arabia and the United Arab Emirates announced plans to boost production capacity following the collapse of coordinated output cuts by Saudi Arabia, Russia and others. The Saudi energy ministry has directed producer Saudi Aramco to raise its output capacity to 13 million from 12 million barrels per day (bpd).
UAE national oil company ADNOC also said it would raise crude supply to more than 4 million bpd in April and accelerate plans to boost its output capacity to 5 million bpd, a target it previously planned to achieve by 2030.
“Saudi’s shock-and-awe strategy suggests to us that to bring Russia back to the negotiating table, it is serious in causing severe price and revenue pain for all oil producers,” UBS analysts said in a note.
Trading in long-dated Brent futures contracts points to expectations that supply will continue to rise. The current Brent front month contract recently traded at more than $US5 below the six-month contract , the biggest discount since January 2016.
Russian Energy Minister Alexander Novak said Saudi Arabia’s plans to increase production capacity were “probably not the best option”, adding Moscow had several phone calls with OPEC and non-OPEC members, but that no partners had agreed to its proposal.
OPEC said in a monthly report that it expected global demand to rise by just 60,000 bpd in 2020, a reduction of 920,000 bpd from its previous forecast.
The US Energy Information Administration also said global oil demand is expected to dive by 910,000 bpd in the first quarter due to coronavirus outbreak.
Numerous North American producers have announced spending cuts including Occidental Petroleum Corp, Marathon Oil Corp and Diamondback Energy Inc.
“Any reduction in spending and drilling will take time to show up in actual production figures and is unlikely to mitigate the bearish impact of a massive Saudi output increase, in case the latter does happen,” oil brokerage PVM’s Tamas Varga said.
Weekly data on US inventories showed little effect from the coronavirus outbreak. Crude stocks rose by 7.7 million barrels, but inventories of gasoline and diesel fell sharply, as refining runs remain at seasonally low levels.
Policymakers and central banks have been taking measures to bolster their economies against disruption caused by the coronavirus outbreak, the latest being the Bank of England which unexpectedly cut interest rates by half a percentage point on Wednesday.
A worker at Equinor’s Martin Linge offshore oil and gas development has been diagnosed with the coronavirus and is being held in isolation, the Norwegian energy firm said. It said activity on the field will be reduced on Wednesday.
However, China’s independent oil refiners are cranking up production as local governments begin to relax strict measures to contain the coronavirus and fuel demand begins to recover.