Oil prices stay under pressure with increase in virus cases outside of China

Abu Dhabi: Oil markets will continue to remain under pressure with a rise in coronavirus cases appearing outside of China, even as the virus also continues to affect demand in China itself, analysts said.

Oil prices on Friday saw Brent closing on $58.50 and West Texas Intermediate (WTI) on $53.38, both of which were up for the second week running.

“Both contracts slipped in their final day of trading as fears that the Covid-19 outbreak was entrenched elsewhere in Asia—South Korea and Japan in particular—weighed on markets,” said Edward Bell, commodity analyst at Emirates NBD.

“Poor PMI data from the US also helped dragged risk markets lower at the end of the week as the US composite PMI for February fell to 49.6, its weakest level since 2013,” he added.

“US economic data has generally held up in recent prints but the dip in business activity may reflect waning confidence in the outlook for the rest of the year should Covid-19 erode external demand,” he said.

Bell said global oil markets remained volatile despite oil prices rallying for their second weekly high, with markets looking to Opec+ for the potential of further production cuts to stabilise oil markets.

Premature optimism

“While there is some apparent optimism in markets that China’s authorities are getting the viral outbreak under control we suspect some of the improvement in the WTI and Brent curves is premature.

“China’s industrial economy is still running at a diminished capacity and lingering fears over the virus spreading will curb air travel for much of H1 2020,” he added.

“The Brent curve could be at risk of slipping back into contango should OPEC+ fail to agree any substantial change in output levels or the length of their current production cut levels,” he said.

Ole Hanson, head of commodity strategy at Saxo Bank, said the uptick in recent oil prices could give way as the coronavirus spreads outside of China, prolonging the global economic impact of the virus.

“Commodity markets’ main source of influence continues to be the news flow related to the Covid-19 virus and the potential risk of it spreading further across Asia and beyond.

“The tentative recovery in key commodities such as… crude oil during the past couple of weeks was amongst other things driven by the narrative that the economic impact would primarily be a Q1 (first quarter of 2020) event.

“With the virus continuing to spread outside of China, this narrative has given way to renewed concerns of the virus having a prolonged and negative impact on the global economy,” he said.