The oil market joined stock markets around the world in a downward freefall as the coronavirus spread.
Prices fell to their lowest in more than a year and in Friday trading, Brent crude was priced just above US$50 with WTI struggling around US$45 a barrel.
There’s only one theme in headlines around the world and that’s the impact of COVID-19 - the deadly virus that is on the move.
Reports of cases in China have declined and the World Health Organization commends the rapid response of the authorities for containing the virus.
However, with cases reported in Iran, Bahrain, Italy and the USA, and possibly up to 50 other countries, the public is running scared and the economic impact is beginning to hit hard.
There’s little good news to be found and the bad news is that it could get worse for oil markets with investment bank Standard Chartered predicting the possibility of a “short term swing below US$30 a barrel".
Investors are running scared too with energy stocks suffering the double whammy of poor annual results being complicated by the impact of the coronavirus.
This is not good news at a time when financing is scarce and investors are being challenged.
Brent crude lost more than 13% on one week, the worst loss since early 2016.
Oil brokerage OANDA called it a “nightmare scenario” for OPEC, if Brent crude hits below US$50 a barrel, prompting calls for a substantial cut from OPEC and friends when they meet in Vienna next week.
Standard Chartered is expecting a “difficult” meeting of ministers in Vienna as the prospect of lower prices in the short term appear to be reality.
OPEC and friends, the group known as OPEC+ have been managing 1.7 million barrels a day off the market in an effort to maintain stability in recent years.
No-one foresaw a threat like the coronavirus and at a time of slower demand in the first quarter, the situation is worse than expected.
Oil markets will be expecting deeper cuts from the group to help alleviate this temporary market upset. Crude exports to China have already been cut, most notably by Saudi Arabia, down about half a million barrels a day due to lower refinery demand.
The impact on stock markets around the world is said to be close to a loss of US$5 trillion. Economic activity is being hit hard, with international travel being curtailed or cancelled, having a knock on impact on oil demand.
The World Health Organization has updated the risk to “very high” as they expect cases everywhere, but WHO refrained from calling it a pandemic.
Given experience of health scares around the world in the past, the market remains confident that the impact will be temporary.
Investment bank UBS says they expect recovery of the oil price in the second half of the year. “While oil prices are expected to remain volatile in the near term, we expect Brent Crude Oil prices to recover to US$64 a barrel in the second half of the year.”
All eyes will be on Vienna next week as ministers gather to assess the situation and make a decision. Their technical advisory committee has already recommended cutting an additional 600,000 barrels a day, but given the urgency and impact of the corona virus, many analysts are expecting a cut of about a million barrels a day to help manage the delicate situation that’s causing havoc in the international markets.
The OPEC meeting is scheduled for March 5 and 6.