Crude oil's descent continued on Monday, as the rapid spread of coronavirus put producers on high alert for a sharp decline in demand.
Crude prices nosedived on Monday, as the rapidly spreading coronavirus dampened the demand outlook for oil’s biggest consumer market.
Russia and Saudi Arabia are reportedly at odds over how to adjust supplies in the wake of the negative demand shock.
The West Texas Intermediate (WTI) benchmark for U.S. crude prices fell nearly 2% to $49.42 a barrel on the New York Mercantile Exchange, its lowest in around 13 months. The futures contract is coming off its fifth straight weekly decline.
Brent crude, the international futures benchmark, declined 2% to $49.42 a barrel on London’s ICE futures exchange.
Commodity prices are also being pressured by a resurgent U.S. dollar. The dollar index (DXY), a broad measure of the greenback’s performance, peaked at 98.88 on Monday, the highest since October. DXY has gained in six straight sessions.
China’s failure to contain the coronavirus outbreak has contributed to oil’s steep drop in recent weeks. Already in a bear market, oil prices could slide another 10% from current levels as the world’s second-largest economy grinds to a halt.
That’s because Chinese demand for crude has plunged by around 20% in the wake of the coronavirus epidemic. It’s said that up to 400 million people across the country are under some kind of quarantine. This includes major economic centers like Shenzhen and Shanghai.
Before the outbreak, China was the world’s largest energy consumer.
The epidemic has already caused Chinese inflation to soar as businesses and supply chains faced disruption. The January consumer price index soared 5.4% annually, its highest in eight years.
With demand plunging, energy producers are struggling to come up with an effective response to keep prices from crashing even further.
Saudi Arabia and its Gulf Arab allies are reportedly seeking production cuts to the tune of 600,000 barrels per day. According to the New York Times, Russia has yet to endorse the recommendations.
As the de facto head of the Organization of Petroleum Exporting Countries (OPEC), Saudi Arabia wields enough power to push for compliance among its Gulf Arab neighbors. Russia, on the other hand, is an external partner that hasn’t always seen eye-to-eye on the need for deep and prolonged production cuts.
Russia and OPEC members are expected to meet later this week to discuss potential market-balancing measures. According to Bloomberg, the oil market is experiencing the biggest demand shock since the global financial crisis of 2008 to 2009.