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Oil Price Fundamental Daily Forecast – Russia Could Approve Cuts after OPEC, IEA Issue Bearish Demand Outlooks

The bearish demand forecasts from OPEC and the IEA are likely going to encourage OPEC and its allies, especially Russia, to implement the additional production cuts recommended last week.
James Hyerczyk

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower on Thursday after giving back earlier gains. The weakness is being fueled by a sharp rise in the number of coronavirus deaths and infections that dampened the optimistic view that the virus had peaked. Furthermore, it also raised concerns that the epidemic’s effect on crude oil demand would worsen.

At 09:59 GMT, April WTI crude oil is trading $51.06, down $0.35 or -0.66% and April Brent crude oil is at $55.25, down $0.54 or -1.15%.

Fresh Coronavirus Data Disrupts This Week’s Rally

On Wednesday, crude oil jumped more than 3% at the high as traders eyed deeper production cuts from OPEC, and as China reported the lowest number of new coronavirus cases since the end of January, easing concerns about a drop-off in demand for oil.

One catalyst changed on Thursday, however, after China’s Hubei province, where the virus is believed to have originated, reported 242 new deaths, double the previous day’s toll and the fastest rise since the pathogen was identified in December.

It also confirmed 14,840 new cases, though it was amplified significantly by a switch to using quicker computerized tomography (CT) scans – which reveal lung infections – to confirm virus cases.

Excluding cases confirmed using the new methods, the number of new cases rose by only 1,508, the official data showed, though for markets the net result was more uncertainty about how long problems are likely to persist.

OPEC Cuts Forecast for Oil Demand Growth This Year

In a closely-watched report published Wednesday, OPEC cut its forecast for oil demand growth this year, saying the coronavirus outbreak was the primary reason.

The cartel said it now expects 2020 daily oil demand growth to be 990,000 barrels per day (bpd), which is 230,000 bpd below prior forecasts.

“The impact of the Coronavirus outbreak on China’s economy has added to the uncertainties surrounding global economic growth in 2020, and by extension global oil demand growth in 2020,” OPEC said in the report.

IEA Says Virus Outbreak to Shrink First-Quarter Oil Demand

Oil demand is set to fall year on year in the first quarter for the first time since the depths of the financial crisis in 2009 hurt by the coronavirus outbreak in China, the International Energy Agency (IEA) said on Thursday.

“The consequences of Covid-19 for global oil demand will be significant. Demand is now expected to contract by 435,000 barrels per day (bpd) in Q1, the first quarterly decrease in more than a decade,” the Paris-based IEA said in a monthly report, using the new scientific name for the virus.

“For 2020 as a whole, we have reduced our global growth forecast by 365,000 bpd to 825,000 bpd, the lowest since 2011,” the IEA said, adding that it assumed economic activity from the second quarter would return progressively to normal.

In the second quarter it said it expected oil demand to grow 1.2 million barrels per day before normalizing in the third quarter with growth of 1.5 million bpd on likely economic stimulus measures in China.

Daily Forecast

The bearish demand forecasts from OPEC and the IEA are likely going to encourage OPEC and its allies, especially Russia, to implement the additional production cuts recommended last week. An OPEC+ technical committee last week recommended expanding production cuts to put a floor under falling oil prices, although there was some resistance from Russia. The major producer said it needed more time, but I think the new forecasts will encourage Russia to sign off on the OPEC+ deeper cut.

Short-covering should drive prices higher if Russia announces it is going along with the output cuts, but gains will be limited since the cuts will not be enough to overcome the demand decline. If Russia passes on the cut, then this will be a disaster. Prices will plunge to multiyear lows.

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