Commodity fever: what is the reason for the record decline in world oil prices

On Thursday, January 23, world oil prices plummeted during global trading. The cost of raw materials of the Brent reference brand fell by 2% and for the first time since the beginning of December 2019 fell below $ 62 per barrel. This is evidenced by the ICE exchange in London.

One of the reasons for lower prices was an increase in oil reserves in the United States. This was in an interview with RT, an analyst at IK "Freedom Finance" Eugene Mironyuk. According to the American Petroleum Institute (API), over the week, the volume of oil reserves in the country increased by 1.6 million barrels.

At the same time, a noticeable increase in drilling activity was recorded in the United States. According to the oil service company Baker Hughes, from January 10 to 17, the number of drilling rigs in the United States increased by 14 units - up to 673.

According to experts, the observed statistics signal to investors about the growth of world oil supply. This situation traditionally causes a drop in commodity quotes.

Moreover, market players were alarmed by the statement by the head of the International Energy Agency (IEA) Fatih Birol. According to him, in the first half of 2020, world crude production may exceed demand by 1 million barrels per day, reports Reuters.

“The pressure on the quotes is provided by the forecasts of the IEA and other research agencies on the reduction in oil demand in 2020. At the same time, global oil production has only slowed slightly, but still continues to increase. According to OPEC, this year the production of energy resources in the world will additionally grow by 1.5 million barrels per day, ”said Yevgeny Mironyuk.

However, experts consider reports of the spread of a new virus in China to be the main cause of oil price fluctuations.

“The news about the outbreak of coronavirus in China affected the dynamics of oil prices. As a result of the spread of the disease, the entire tourism industry and passenger traffic in China were under attack. The current state of affairs risks turning into a decrease in fuel demand, ”Dmitry Alexandrov, chief strategist at Univer Capital, told RT.

At the end of December 2019, authorities in the Chinese city of Wuhan reported an outbreak of a respiratory infection of unknown origin. January 9, the Central Television of China with reference to a group of specialists called the cause of the disease a new type of coronavirus. At that time, 15 confirmed cases of infection were detected.

To date, cases have already been reported in Beijing, Shanghai and other major cities of the country. At the same time, the official number of infected increased to 617 people, 17 infected residents died. This was reported by the Chinese television channel CGTN.

The virus has already begun to spread outside of China. According to the authorities of the PRC, cases of the disease are recorded in Japan, Thailand and South Korea. At the same time, several people were hospitalized on suspicion of pneumonia in Singapore. This is stated on the website of the Ministry of Health of the Republic.

“Investors remember the SARS that raged in Southeast Asia in 2002-2003. Then the total economic damage amounted to $ 59 billion. For example, Hong Kong lost about $ 12 billion, or 7.6% of its GDP, ”Mikhail Kogan, head of the analytical research department of the Higher School of Financial Management, recalled in a conversation with RT.

Today, the situation is complicated by the approach of the New Year on the lunar calendar. Mass celebrations in Asia will begin on January 25 and will last several weeks. At this time, the vacation period starts and the tourist flow increases. According to the South China Morning Post, in 2019, the number of trips inside China during the celebrations amounted to about 3 billion.

A possible reduction in tourist flow and a drop in demand for fuel in Asia could lead to an even greater decline in oil prices. At the same time, analysts do not yet expect a sharp collapse of the market. As Igor Galaktionov, an expert on the stock market of BCS Broker, noted in an interview with RT, OPEC + could provide support for oil prices.

From January 1, 2020, Russia and other countries participating in the agreement reduce production by 1.7 million barrels per day compared to the level of October 2018. Thus, the fulfillment of the terms of the contract will have to restore the balance of supply and demand in order to keep prices from significant fluctuations, experts say.

“Taking into account all the factors that affect the market today, we can assume that while maintaining current conditions in the first half of 2020, the price of Brent crude oil will nevertheless stay in the range of $ 62–67 per barrel,” added Igor Galaktionov.