IT has been a fast and furious few weeks. Last Monday, the price for US crude WTI dipped below $50 a barrel for the first time since January 2019. WTI briefly traded as low as $49.92 a barrel on Monday morning, the lowest level on record for the North American oil benchmark in more than a year.

Less than a month ago, WTI was going for more than $63 a barrel. Then gloom set in.

China’s oil demand amid the coronavirus outbreak is causing the worst oil demand destruction since the financial crisis of 2008-2009. Investment Bank Goldman Sachs analysts are of the view that the steep decline in oil prices over the past few weeks is “effectively pricing in a large oil demand shock”. The bank sees Brent prices averaging $63 a barrel for the entire 2020.

Edward Morse, Citigroup Inc’s global head of commodities research, is more conservative on price targets for Brent Crude in 2020. Morse cut his first-quarter forecast to $54 from $69 and his second-quarter target to $50 from $68. Morse sees prices recovering slightly in the third-quarter, hitting $53, but that’s still $10 down from his original target.

In the next three months, Morse feels, Brent prices could fall as low as $47 per barrel. “The large oil-price revision comes from the view now that this outbreak could have a longer and deeper demand impact than earlier thought, though there remains plenty of uncertainty, with much still depending on how far the virus spreads,” Morse underlines.

Demand is dropping sharply. For the last many years, China has been the driver of global crude demand growth. That is now under a cloud. As per a Financial Times report, Chinese energy executives are expecting the country’s oil consumption to plunge by somewhere 25 per cent this month. Executives at some of the country’s largest refineries expect that nationwide demand to fall by a staggering 3.2 million barrels per day (bpd) in February from last year — a drop equivalent to more than 3pc of global consumption.

Bloomberg earlier repor­ted that demand in China could slump by as much as 20pc. Due to the extensive travel restrictions and factory activity stalling, this 20pc plunge in oil demand would be equal to around 3m bpd, making this the most sudden shock to global oil demand since 9/11, Bloomberg said quoting industry pundits.

“We estimate demand in China is down anywhere from 2 to 3m bpd — on par with 08-09,” Jeff Currie, global head of commodities research at Goldman Sachs told Bloomberg.

The economic slowdown due to the outbreak could cut global consumption by 300,000 bpd to 500,000 bpd for full 2020, which would be around 0.5pc of global demand, Reuters quoted BP’s chief financial officer Brian Gilvary as saying.

Energy consultancy Wood Mackenzie has also revised its annual oil demand growth forecast for China for 2020 down by over 200,000 bpd from the previous outlook in early January.

“The Q1 2020 fall in Chinese demand — a 200,000 bpd drop to 13m bpd — is the first year-on-year decline in the country’s demand since 2009,” Ann-Louise Hittle, Vice President, Macro Oils, at Wood Mackenzie was quoted as saying.

The emerging scenario is grim from the view point of the Organisation of Petro­leum Exporting Countries (Opec). It is now in an emergency mode. It needs to act and soon. If not, prices could continue sliding.

An Opec+ technical panel, the Joint Technical Committee (JTC) has recommended a provisional cut in oil output of 600,000 bpd in addition to the current agreed upon output cut target of 1.7m bpd. Some reports indicate the additional cuts Opec+ could even go beyond. However, Russia has asked for more time for consultations, reports indicate. As per press reports, once Russia voiced its opposition to a deeper supply cut and instead suggested an extension of current cuts of 1.7m bpd, the JTC panel had to extend its meeting into a third day on Thursday.

A proposal to advance the Opec+ ministerial from March also seems dependent on Russian agreement to the additional output cut. Opec sources are hinting that the Opec plus ministerial was unlikely to be brought forward unless there was general agreement on an additional output cut. That is still missing. And prices continue to crumble.

Even if there is an agreement, one thing is obvious: Saudi Arabia will have to bear most of the burden of the additional output cut.

Not the best of the times for Opec and its allies.

Published in Dawn, February 9th, 2020