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In A Virus-Hit Oil Market, OPEC Seeks That Magic Called Equilibrium

By Investing.com (Barani Krishnan/Investing.com)CommoditiesFeb 05, 2020 11:18AM ET
www.investing.com/analysis/in-a-virushit-oil-market-opec-seeks-that-magic-called-equilibrium-200504657
In A Virus-Hit Oil Market, OPEC Seeks That Magic Called Equilibrium
By Investing.com (Barani Krishnan/Investing.com)   |  Feb 05, 2020 11:18AM ET
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In the classic bear market for oil, OPEC never wins in the first round.

Those familiar with the modus operandi of the cartel shouldn’t be surprised by the outcome of yesterday’s opening meeting in Vienna by the 23 oil-producing countries trying to find a solution to the latest bust in crude prices.

After a brief run-up, both Brent and U.S. crude fell back on the day as short-sellers upheld the doom and gloom of demand impaired by China’s coronavirus crisis, even as OPEC hinted it could cut up to another million barrels per day in supply. The result: Oil Bears 1 - OPEC 0.

Brent Futures Weekly Prices
Brent Futures Weekly Prices

Losing Now, In The Hope of Winning Later

Losing isn’t new to OPEC. Typically, with the exception of its few members who are prone to theatrics, the brethren of oil and energy ministers, guided by their undisputed leader from Saudi Arabia, project a picture of surreal tranquility even in crisis.

Despite having to work a lot harder now than 40 years ago to influence the market, and being scorned by critics as irrelevant to the modern-age of oil trading, OPEC’s ways of squeezing supply to get the crude price it wants has proven effective over time.

The way OPEC meetings play out is almost always the same: total chaos and disagreement on Day One; then, sudden amazing solidarity before the end of Day Two; followed immediately by the announcement of product rationing that usually sends the crude market up, even if briefly.

Thus, as we approach another Day 2 of an OPEC meeting today — this time a “technical-level meeting” between the cartel’s 13 original members led by Saudi Arabia and 10 allies put together by Russia — it wouldn’t be wrong to expect more of the same-old-same-old from the group.

We also shouldn’t be surprised to hear before the end of the day from Saudi Energy Minister Abdulaziz bin Salman — who isn’t at the meeting but is obviously following it in real-time through briefings by his representatives — as he attempts to take charge of the narrative lost on Tuesday.

Since coming into the job in the aftermath of the September terror attack on Saudi oil facilities, Prince Abdulaziz got the seemingly impossible listing of Riyadh’s state oil company Saudi Aramco (SE:2222) done. And even before the present crisis, he announced in December an ambitious OPEC+ production cut that could take as much as 2.1 million bpd, or 2.1% of world supply, off the market — a pledge that helped crude prices end 2019 with their best gain in three years.

But This Is a Different Challenge for OPEC

But the coronavirus epidemic poses an entirely different problem for the Saudi prince.

As we stated in yesterday’s analysis, unlike past sell-offs in oil where oversupply was always the problem, the present crisis is more about demand or rather, the lack of it.

From the Saudi perspective, anemic demand means that ultimately there’ll be excessive oil in the market and cutting production will be the way to go.

Yet, this price bust is different from the three-year long U.S. shale oil-driven market crash that began in 2014 from a glut of cheap oil.

At today’s rate, demand for oil is disappearing at a frightening rate and it’s happening all because of one source — China — which also happens to be the largest buyer of the commodity.

WTI Futures Weekly Prices
WTI Futures Weekly Prices

Lots of numbers have been thrown around in the past 48 hours on how bad the rut is in Chinese demand — from estimates of a daily drop of 3.0 million barrels, or 20% of consumption, to a shutdown of nearly half of China’s 40 independent refineries.

OPEC Shooting In The Dark, Hoping For a Magical Outcome

But the truth really is that no one knows how bad the Chinese situation could get.

Notwithstanding the argument that the first day of an OPEC meeting seldom goes well, Tuesday’s lower close in oil despite an early rebound is telling of what the buy-side of the market has discovered, which OPEC is still missing.

And that's that this is a demand crisis, not a supply one. OPEC still seems to have its blinkers on, viewing the situation as an oncoming glut that it can cut its way out of.

Without knowing how much worse the Chinese demand for oil could get and until we have some real solid indication of that, OPEC is just shooting in the dark by saying it's going to cut X many barrels.

The market’s fear is that at the end of the day, OPEC will not do enough and Chinese demand will tumble even more than the cartel anticipates.

But it’s hard to fault OPEC for what it’s doing because other than product rationing, it has no other trick to get the market back up.

OPEC’s best hope will be to reduce supply to a level where it reaches the equilibrium of Chinese and global oil demand.

That, essentially, is the magic word the cartel is seeking: equilibrium.

In A Virus-Hit Oil Market, OPEC Seeks That Magic Called Equilibrium
 

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In A Virus-Hit Oil Market, OPEC Seeks That Magic Called Equilibrium

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Comments (8)
MURSON CAPITAL INC
MURSON CAPITAL INC Feb 05, 2020 1:05PM ET
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Crisis in China: Close to 60 million people remain under lock down in China, with three cities reporting over a thousand confirmed cases.,,,just 60 million right now then ...usa export oil china is not buying oil much any more ...global growth slow thanks trump for trade war .... for cheap oil ...who cares about saudi arabia ,they spend their money to war isnt it if they are world be more peaceful isnt it ,am i right ?
Daesang Lee
Daesang Lee Feb 05, 2020 10:22AM ET
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It is impossible to make vaccines against viruses because of the structure of the virus. The news of making a vaccine for the virus is fake.
Barani Krishnan
Barani Krishnan Feb 05, 2020 10:22AM ET
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Dapsang, I think the effort is to slow the spread and control it from becoming fatal in those infected. But in theory, yes, viruses mutate and move on.
db cooper
db cooper Feb 05, 2020 10:22AM ET
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Cocktail of HIV drugs and flu vaccines in Thailand already has people testing negative who were positive for corona virus - even the elderly - and are being discharged and sent home.   They state however that a huge volume of these drugs must be manufactured to deal with the outbreak which will take time.
inderjeet virk
inderjeet virk Feb 05, 2020 9:48AM ET
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oil market is behaving like "sell first question later" without knowing the real affect of coronavirus there shouldn't be any hasty decision ,shale oil production is already slowing down which can offset lower demand for Chinese market.
Barani Krishnan
Barani Krishnan Feb 05, 2020 9:48AM ET
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Yes, but that's also true of all markets, Inderjeet. Wall Street is the perfect contrarion to oil now: Buy first, ask questions later.
Herowain Herman
Herowain Herman Feb 05, 2020 9:32AM ET
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Ps. Brilliant article
Barani Krishnan
Barani Krishnan Feb 05, 2020 9:32AM ET
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Thanks much. You can follow us @Investingcom too. My handle is @barani_krishnan. Thanks again.
Herowain Herman
Herowain Herman Feb 05, 2020 9:32AM ET
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I pray they find a cure for this virus. So life can get back to normal.
Barani Krishnan
Barani Krishnan Feb 05, 2020 9:32AM ET
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That appears to be on the way: https://www.google.com/amp/s/www.cnbc.com/amp/2020/02/05/global-stocks-and-oil-prices-rally-on-coronavirus-drug-hopes.html
Notvery Goodathis
Peteymcletey Feb 05, 2020 8:13AM ET
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Best outcome for oil is a massive cut announced just before cure announced.
Barani Krishnan
Barani Krishnan Feb 05, 2020 8:13AM ET
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There seems to be a lack of consensus between the Saudis and Russians. Let's also see what the EIA announces.
Dev Nandan
Dev Nandan Feb 05, 2020 5:56AM ET
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The magical support broken by WTI... Still the momentum holds...By the end of the day we will come to know,crude will sustain or close below critical support.
Barani Krishnan
Barani Krishnan Feb 05, 2020 5:56AM ET
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Yes, Dev. We'll have to see what the next numbers reveal. So far, all we have a theories, including mine :) But really, this has been an extremely different challenge within an extremely short span for OPEC.
Mubarak Ali
Mubarak Ali Feb 05, 2020 5:42AM ET
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virus medicine has found will it go up brother and plus opec news all positive news fade on oil???
Barani Krishnan
Barani Krishnan Feb 05, 2020 5:42AM ET
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Yes, vaccine and other cures will be game changers because essentially that's what dragging this crisis isn't it -- the inability thus far to bring it under control and stop it's spread.
 
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