Oil and virus: the forecast for February

the Outbreak of coronavirus infection in China dramatically upset the existing classifications in commodity markets. It is possible that, if the dynamics of the spread of the disease will not be broken in the near future, the new coronavirus will be for the oil market the “black Swan”, which did not expect and therefore did not take into account, says Alexey Kalachev, an analyst CC “FINAM”.

“the Market used to assess the two parties that determined the dynamics of oil prices in the last four years. On the one hand, it is the US increasing shale oil production and countries that are interested in the growth of conventional oil production, Canada, Brazil, Norway. They ensure the growth of excess supply in the oil market. On the other hand, OPEC countries and States have agreed to work together with the organization of exporting countries to reduce production. Including Russia. The OPEC agreement+ on the limitation of oil production allowed in fact to regain control of the oil market, balancing it and reducing the overhang of demand over supply. Adjusting the volume of proposals in recent years, joint efforts to some extent able to smooth price fluctuations, holding the price, although wide, but quite comfortable for producers and consumers the hallway. But emerging after the release of the record volumes of the slowdown in shale oil production in the US gave hope for ultimate recovery of the oil balance. Already louder, especially in Russia, began voices, offering to withdraw from the agreement with OPEC.

the China Factor remained as if in parentheses, or in the best case was estimated to be consistently positive, due to the continuous rise in oil consumption growing industry of China. Meanwhile, as the world’s largest importer of oil, China has essentially become the third factor of the global oil market. It just had no reason to be sure. But now the new Eastern pneumonia, and to a greater extent unprecedented pon the scale quarantine measures in China, give a reason in the most visible incarnation.

Under the impact of the production decline caused by the proliferation of 2019 coronavirus-nCov, China reduced its purchases of oil to 3 million barrels per day. That’s a lot. Especially when you consider that the first round of settling trade relations with the United States, China has agreed to increase the purchase of American energy. The total volume of reduced oil production, the obligations of which are OPEC members+ is 1.7 million barrels per day. Thus, world production exceeded consumption by approximately 1 million barrels per day. Reducing demand by 3 million barrels can not hit the market. Best price Jan the price of oil has lost about 15% -20%. And, it seems, is not the limit.

In February, apparently, will have a peak of infection. In the best case to reverse the situation the Chinese authorities will not until March. Only after that the dynamics of procurement of raw materials will start to recover. That will start in commodity markets, if the Chinese authorities fail to curb the epidemic, do not want to think.

In this situation, the representatives of the countries participating in the agreement OPEC+ extra intend to meet in February, without waiting for scheduled in March the next meeting to try to agree on a new reduction in oil production. But this time, this measure may not work. To reduce production as required by the demand in China is unlikely. I don’t think even Saudi Arabia will go for it, despite all the statements. And especially not likely to severely limit Russian oil industry, already thatwas its obligations in recent years.

There’s not fit of the next reduction of oil production to negotiate, and to start large-scale international aid to China to fight the epidemic and for a speedy restoration of the smooth operation of the industry. Moreover, hthe situation affects not only the oil market: falling demand for copper, aluminum, Nickel and other industrial metals, more than half of industrial processing in which the finished product is provided globally, the industry of China. If you don’t stabilize the situation, it can lead to the beginning of the global recession in all markets, including financial.

Remaining optimistic and believing that by mid-February the peak of the spread of the virus will be passed, I hope that the price of BRENT crude oil in February, although it will continue to decline, will not fall much below $ 50 per barrel. Where under the combined influence recovery procurement resources in China and the new agreement, OPEC+ the price will return to a level near $ 60 per barrel. If the level $ 50 for one reason or another fails to hold, oil quotations will open the way down to $ 40 per barrel. But it will be another, in a sense, an alternative history”.