On Tuesday, March West Texas Intermediate crude ended the day’s trading at $49.61 per barrel. That is the lowest price in just over a year. April Brent crude also fell, dropping to $53.96 a barrel, a price low that hasn’t been seen since the end of 2018. Both declines fit the classic bear market definition of a 20 percent fall from recent high points, contributing to OPEC’s decision to reconsider its position on the need for emergency action.
OPEC Responds to China’s Decreased Demand
Last week, OPEC didn’t think the decline in oil price required any emergency action. However, the overall situation in the oil market has deteriorated with the coronavirus outbreak. On Tuesday, China’s official numbers claimed 490 coronavirus deaths and more than 23 thousand confirmed cases of the virus. Quarantines and increasing travel restrictions, accompanied by factory and shop closures, have quickly reduced China’s fuel demand by 20 percent, adding stress to an already troubled oil market.
Approximately two-thirds of China’s economy is shut down at least until the second week of February. With the numbers of confirmed cases and deaths continuing to rise, there’s no guarantee that the shut downs won’t last longer, further impacting demand. In light of this rapidly evolving situation, delegates from the OPEC nations and their oil-producing allies met to discuss taking emergency action to reduce production.
Production Cut May Be Larger Than Expected
Initially, a production cut of 500,000 barrels per day was discussed, according to CNBC. However, the Wall Street Journal reported that delegate talks on Tuesday indicated that the group may recommend significantly higher cuts, possibly as much as 800,000 to one million barrels per day. The delegates will be making their formal recommendations this week. OPEC is expected to meet February 14 and 15, three weeks earlier than expected, to make their decision.
Oil Industry Already Struggling
According to a Baltimore Sun report, last year saw 42 oil and gas companies make bankruptcy filings. There were significant job losses in the oil industry as companies struggled to navigate through a period of lower oil prices. Earnings for some of the industry giants, including Exxon Mobil, Chevron and ConocoPhillips again disappointed investors. Market conditions can hit American companies harder because, with the reliance on shale drilling, profit margins are a lot slimmer than those in the OPEC nations. To just meet expenses for shale drilling, American producers need oil prices need to be at $45 per barrel.
Next Few Weeks Critical
China’s drastic demand drop is a natural reaction to a serious crisis. The world’s top researchers are working quickly towards finding a way to bring this coronavirus crisis under control. Thailand’s doctors have had some success treating the virus by combining two HIV drugs, ritonavir and lopinavir, with oseltamivir, a flu drug. Gilead is starting human testing for their new anti-viral, Remdesivir. The next few weeks are going to be critical in determining just how deeply this virus is going to impact the oil markets over the long-term.