Markets oil OPEC

COVID Commodities Carnage Raises Stakes For Crude Cartel

Head in the sand?

Oil collapsed nearly 4% on Monday and copper careened lower too, as growth concerns and demand destruction worries predominate.

The proliferation of the coronavirus in Italy and South Korea over the weekend deep-sixed risk sentiment, and commodities are once again in the crosshairs. Corn and soybeans dropped, as market participants question whether China will be able to make good on its commitments under the “Phase One” trade deal.

The disconnect between crude, copper and US equities is quite something to behold.

Saudi shares fell the most in months, and Aramco, which came into the day riding a five-session win streak, logged its worst session since December 19.

Iran said the number of COVID-19 infections in the country is now 61, up sharply from 43 in the last count. 12 people have died.

Bahrain and Iraq reported their first cases, Kuwait said a trio of infections are tied to people who have been to Iran, and travel and immigration restrictions were imposed by Saudi Arabia, Kuwait, Iraq, Turkey, Pakistan and Afghanistan, which reported its first case.

Crude has been beset with demand concerns for more than a year, and the virus outbreak has exacerbated the situation materially. Russia’s foot-dragging on whether to support emergency measures aimed at stabilizing the market hasn’t helped.

Bloomberg’s Julian Lee has an entertaining new opinion piece out on the situation today which you should peruse at your leisure. It begins as follows:

As the Covid-19 virus hit demand for oil, OPEC kingpin Saudi Arabia wanted an urgent meeting among the cartel’s members and their international partners in order to bring in deeper and longer output cuts. Russia didn’t, and now the emergency gathering of the 23-nation coalition known as OPEC+ won’t happen. This is only the latest in a series of slights that the biggest member of OPEC’s allies has delivered to the wider group, ratcheting up questions about its potency to truly impact oil production levels and therefore prices. 

The bottom line (for right now, anyway) is that estimating the demand hit from the virus outbreak is an exercise in futility. China’s oil demand plunged recently by around 3 million barrels/day, amounting to 20% of total consumption.

Meanwhile, it’s not at all clear that OPEC is being totally realistic about the likely hit. For example (and this has been highlighted a couple of different places over the past week, but it bears repeating), the IEA’s revision to first quarter oil demand estimates from January to February was dramatic. OPEC’s, not so much:

You can draw your own conclusions, but the worse the virus news gets, and the more resilient the dollar looks, the more pressure crude will likely come under.

Remember, prices are coming off their worst start to a year since 1991 in January.

Deflation beckons.

Read more:

World’s Most Profitable Company Starting To Get Annoyed With Pesky Virus

What Collapsing Oil Prices Are Saying About The Impact Of The Coronavirus

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