Oil Stages "Remarkable" Rebound on Hopes of OPEC Combating Coronavirus Impact

But one analyst says over 1 million BPD in cuts are required: File Image/PixaBay

Assurances from world banks and the Organization of the Petroleum Exporting Countries (OPEC) that they would stabilize markets against the economic impact of a spreading coronavirus caused crude prices to rise sharply on Monday, after six sessions of losses.

Brent rose 4.3 percent, or $2.20, to trade at $51.87 per barrel, while West Texas Intermediate gained $1.99, or 4.45 percent, to settle at $46.75 per barrel.

Marshall Steeves, an analyst at IHS Markit, called Monday’s trading “a remarkable bounce back in concert with the recovering global financial markets; investors are pricing in a coordinated global response by central banks.”

We think that OPEC will deliver

Ehsan Khoman, head of MENA research, MUFG

Despite the gains being welcome, it’s unclear why traders felt compelled to set aside their pessimism and boost prices, considering no decision has been made if OPEC will enact deeper production cuts in order to counter a drop in demand due to the virus – and also considering Russia has only informally stated it will maintain its cooperation with the cartel.

Also, data released from China over the weekend showed that factory activity shrank at the fastest pace ever in February.

Still, renewed focus is being placed on OPEC as a panacea to the current market woes, and analysts at Fitch Solutions said, “Inaction by OPEC+ would likely trigger another potentially severe bout of selling.”

The analysts added that further output cuts would likely be of shorter duration than past cuts, probably on the order of three months.

Unsurprisingly, at least one analytical body believes the cuts should and will be much deeper: Ehsan Khoman, head of MENA research at MUFG, on Monday said that 1.2 million barrels per day (bpd) of additional production cuts from the second quarter of 2020 until the end of the year is required to balance the market (double what OPEC is rumoured to be considering).

He remarked, “We think that OPEC will deliver, we think that they will go out of their way, and they will go beyond what’s currently priced in,” and he added that “This 1.2 million barrels a day of our baseline case for the next nine months is what’s going to cause the next leg higher in oil prices in the week ahead.”

Khoman went on to note that “Anything below a million (bpd), then we could see a leg lower, anything with Brent hovering around the $40 mark; that’s really disconcerting.”

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