China virus forces OPEC to weigh up extension to oil output cuts

Venezuela’s Oil Minister Manuel Quevedo, Saudi Arabia’s Minister of Energy Prince Abdul Aziz bin Salman and Russia’s Energy Minister Alexander Novak. (Reuters)
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Updated 29 January 2020

China virus forces OPEC to weigh up extension to oil output cuts

  • Slide in crude prices to three-month low alarms officials amid concerns over coronavirus’ impact on economic growth

LONDON: OPEC wants to extend current oil output cuts until at least June, with the possibility of deeper reductions on the table if oil demand in China is significantly affected by the spread of a new coronavirus, OPEC sources said.

The quick slide in oil prices over the past few days has alarmed OPEC officials, the sources say, as the new virus found in China and several other countries raised concerns about a hit to economic growth and oil demand.

Oil futures were on course for a sixth day of losses with Brent crude staying below $60 per barrel. On Monday it hit a three-month low of $58.50, as the virus outbreak triggered a global selloff of riskier assets.

Saudi Arabia, OPEC’s de-facto leader, joined by key oil producers such as the United Arab Emirates, Algeria and Oman, sought to calm market jitters on Monday — urging caution against gloomy expectations on the impact of the virus on the global economy and oil demand.

But OPEC officials have also started weighing their options and intensified internal discussion on how best to respond to the price slump, the sources said.

“A further extension is a strong possibility and a deeper cut is a possibility,” said one OPEC source, adding that the impact of the China virus outbreak on oil demand would be clearer over the coming week.

“Extension is highly possible until June,” another source said, adding that an additional preferable option is to extend the oil producers’ pact until end of 2020 and that a deeper cut was “possible” if there was a need for it.

A source familiar with Russian thinking, said that although Moscow had been keen earlier to exit from price cuts, it would stay on board if oil prices continued to trade below $60 a barrel

OPEC+, which includes Russia, has been reducing oil supply to support prices, agreeing in December to hold back 1.7 million barrels per day (bpd) of output until the end of March.

Russia had insisted it wanted the current deal to last only until March, while Saudi Arabia has been keener for the deal to last longer, according to OPEC+ sources.

This year, OPEC expects its world market share to fall further as output booms in non-OPEC rivals including the US, Brazil, Canada, Australia, Norway and Guyana while global demand is rising.


Gulf economies to take coronavirus exports hit says S&P

Updated 4 min 51 sec ago

Gulf economies to take coronavirus exports hit says S&P

  • S&P expects oil prices to remain at $60 per barrel in 2020 and decline to $55 from 2021
  • The ratings agency expects the impact on the banking sector to be low, with little direct exposure to Chinese companies

LONDON: Gulf states already hurt by a weak oil price could reap further economic pain from the impact of the coronavirus on their exports, S&P Global Ratings warned on Monday.

The ratings agency believes there is a risk that the economic impact of the virus could increase unpredictably with implications for overall economic growth, the oil price and the creditworthiness of some companies. Still, its base case scenario anticipates a limited impact for now.

“Given the importance of the Chinese economy to global economic activity, S&P Global Ratings expects recent developments could weigh on growth prospects in the GCC, already affected by low oil prices and geopolitical uncertainty,” it said in a report.

Although the rate of spread and timing of the peak of the new coronavirus is still uncertain, S&P said that modeling by epidemiologists indicated a likely range for the peak of between late-February and June.

Notwithstanding the spread of the virus, S&P expects oil prices to remain at $60 per barrel in 2020 and decline to $55 from 2021.

It sees the biggest potential impact on regional economies to be felt in terms of export volumes. S&P estimates that GCC countries send between 4 percent and 45 percent of their exported goods to China, with Oman being the most exposed (45.1 percent) and the UAE the least exposed (4.2 percent).

Beyond the trade of goods, the Gulf’s hospitality sector could also feel the effect of reduced tourist arrivals with hotels and shopping malls likely to suffer. The impact could be further amplified because of the high-spending nature of Chinese tourists.

On-location spending by Chinese tourists is the fourth largest in the world at $3,064 per person, according to Nielsen data. About 1.4 million Chinese tourists visited the GCC in 2018 with expectations of that figure rising to 2.2 million in 2023, and with the UAE as the main destination.

Chinese passengers also accounted for 3.9 percent of passengers passing through Dubai International Airport in 2018.

S&P said that if the effect of the new coronavirus is felt beyond March, the number of visitors to Expo 2020 in Dubai could be lower than expected.

The ratings agency expects the impact on the banking sector to be low, with little direct exposure to Chinese companies.