Oil Prices Recovery Pushed by Supply Cut Hopes

February 4, 2020 | Tuesday



On Tuesday, oil prices rebounded by increasing 1% after the last session's slump. And this is because of the hopes for new production curbs by OPEC and its allies to offset any decline in the future fuel demand that might be triggered by China's coronavirus outbreak. Brent crude was trading at $54.93 per barrel, up by 48 cents or almost 0.9%. Then, U.S. West Texas Intermediate (WTI) crude rose 57 cents or more than 1%, at $50.68 per barrel. Aside from that, an extended slide during the past two weeks on worries about the global economic impact of the coronavirus means prices are still near to 20% lower than this year's peak on January 8 despite Tuesday's gains. Also, Monday's fall left crude prices at their lowest in over a year. Then, some people familiar with the matter stated on Monday that the OPEC+ were considering chopping crude output by at least 500,000 barrels per day (bpd). And this was due to the effect on demand from the coronavirus. Analyst Margaret Yang explained, "A some half-a-million-barrel cut is expected, but we won't rule out an even deeper cut should the situation worsen." She also indicated that the expectation had caused a surge in oil trading today. Despite the calmer trading, reflecting other financial markets on Tuesday, Goldman Sachs warned that while it sees oil producers responding to the situation by cutting supply, the coronavirus outbreak's effect on demand might keep volatility in spot prices elevated.

China's Virus

Recently, the coronavirus has claimed over 420 lives in China and resulted in deaths in the Philippines and Hong Kong. Goldman noted, "Oil prices are now at levels where we would expect a supply response from both OPEC and shale producers, and where China would likely seek to build crude inventories." But still, others warned that any failure from OPEC+ is taking what investors deem appropriately robust action to limit the damage of the virus on oil markets could ignite more price drops. OANDA's market analyst Edward Moya stated, "If OPEC+ fails to deliver an emergency response to the coronavirus, crude prices could slump another 10%." According to Moya, even if they impose the supply cuts, the virus still might outstrip the impact. Also, the expectations are mounting that Saudi Arabia will do anything to guarantee that the oil-producing alliance brings deeper cuts. However, it may not matter if the virus displays any sign of easing.


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