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Oil Hits 2019 Lows as Virus Drains China Demand

© Reuters.

By Barani Krishnan

Investing.com – Oil prices fell to their lowest in more than a year on Monday as China’s coronavirus crisis entered its second month, threatening to further drain demand for crude in the world’s largest consumer.

The top two benchmarks for crude — and WTI — both broke key support levels that could encourage further selling in the coming days, traders said.

Brent, the London-traded benchmark for crude oil, broke its key support of $55 per barrel, tumbling $1.36, or 2.4%, to $55.26 by 1:10 PM ET (18:10 GMT). It struck a 13-month low of $54.28 earlier.

Brent lost more than 14% at January’s close on Friday for its worst monthly slide since November 2018.

New York-traded , the U.S. crude benchmark, slumped 80 cents, or 1.6% to $50.76. It hit a 13-month low of $49.94 earlier. WTI fell nearly 16% in January for its biggest slide in eight months.

Chinese oil demand has dropped by about 3 million barrels a day, or 20% of total consumption, as the coronavirus, which has killed more than 360 people and infected over 17,000 in China, squeezes the world’s second-largest economy, Bloomberg reported.

As many as 18 independent oil refineries in China, out of an operating 40, may be cutting runs or shutting completely as the coronavirus reduces demand for fuel, according to traders familiar with operations at the plants known as teapots, Bloomberg added.

It said the drop is probably the largest demand shock the oil market has suffered since the global financial crisis of 2008 to 2009 and the most sudden since the Sept. 11 attacks and could force drastic action by OPEC and its allies.

OPEC and its allies, who cooperate under an initiative called OPEC+, were to hold a technical meeting on Tuesday and Wednesday to find workable solutions to staunch the market’s bleeding when the alliance’s top decision-makers meet in March. The Wall Street Journal suggested that OPEC+ could add a further 500,000 barrels per day cut to its commitment to reduce 1.7 million barrels per day in the first quarter of 2020.

Notwithstanding those cuts, OPEC’s kingpin, Saudi Arabia, was reported on Monday to be mulling another 1 million barrels per day cut on its own, on top of the supplemental 400,000 bpd reduction it promised OPEC+ for the first quarter.

Despite the reported OPEC actions, Brent and WTI were already in contango, a situation in commodity markets where the front-month trades at a discount to farther-out months for oil delivery. Contango doesn’t benefit the funds that invest passively in commodities. These funds maintain their positions by moving from an expiring front-month into the nearby position, and such a “roll” in market lingo, incur losses when the switch involves a costlier contract.

In Monday’s session, front-month contango in Brent and WTI were both about 15 cents each to the next immediate month. While the differential was still manageable for many big funds, any further deepening could encourage the 2014-2017 style of massive oil storing by those determined not to be forced into a fire sale of the commodity.

“Bottom line is that the market is trading like it needs to store crude globally in the near term (amid the) physical buyers strike,” said Scott Shelton, energy futures broker at ICAP (LON:) in Durham, N.C.

“As for the big picture, a lack of roll return is also ominous for the markets, resulting in long liquidation across energy from investors looking for roll yield.”

Source: Investing.com