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Oil market factoring Corona

global crude oil prices slumped five percent yesterday. what was all revolving around the upcoming opec meeting and

Updated Feb 26 2020

global crude oil prices slumped five percent yesterday. what was all revolving around the upcoming opec meeting and its timing, now centers around the ever-spreading coronavirus (covid-19). until last week, there was growing consensus that oil prices have largely factored in the covid-19. but the panic that gripped the market on monday - in the aftermath of global media reporting spread of covid-19 outside asia - tells another story.

the medium- to long-term economic disruption resulting from covid-19 is anyone’s guess.  but surely, the world is now taking notice. the radius of disruption, which was earlier believed to have only hit china, has now spread far beyond. “the economic disruption as a super spreader could trigger a massive drop in economic activity around the globe of proportions that the world has never dealt with before,” said a research note by leading oil market strategist, axicorp.

these sentiments are now echoed across the globe, as covid-19 is now feared to have developed into a global pandemic. the equity markets too, reacted sharply to growing fears – confirming that the risk premium is now attached with new realities. varying estimates are making rounds regarding the possible impact on global crude oil demand.

even the most conservative estimate puts the possible effect on oil demand close to 0.2 million barrels a day. those at the higher end have put the potential loss in demand as high as 0.5 million barrels per day, which could send global oil market demand to the lowest in over a decade. little wonder why there are talks of oil reverting to mid- to low $30s per barrel.

granted, that oil market has traditionally been very reactive to events - even those carrying potentially high degree of positive or negative change. the price slump could well be very short-lived, if the fears subside or the virus does not turn out to be a global pandemic as is currently feared. but the other extreme could really make life difficult for opec members, who are due to meet next month.

opec has been contemplating an emergency meeting to formulate a strategy in the aftermath of covid-19. but russia has voted against an emergency meeting, throwing hints that it may not be overly interested in pledging fresh production cuts. recall that opec had extended the production cuts to new lows in the last meeting.  as the leader of the cartel, it appears highly likely that ksa would volunteer for deeper production cuts, and possibly agree on floating cuts for other smaller partners.

whichever way it goes, next two weeks are very crucial in deciding the mid-term range of crude prices. for the oil importing countries, this could be a short window of opportunity to beef up tax revenues. but if it must come down to persistently low oil price, it will also come with a sizeable reduction in global productivity, the impact of which will be felt by every economy, irrespective of size.

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