Hopes of a steeper cut in output by Opec lifts oil price 3%

London — Oil prices jumped more than 3% on Monday, reversing an earlier fall to multiyear lows as hopes of a deeper cut in output by Opec and stimulus from central banks countered worries about damage to demand from the coronavirus outbreak.

Brent crude was at $51.91 a barrel, up $1.71 or 3.4%, by 9.25am GMT, having earlier hit its lowest since July 2017 at $48.40.

Across the Atlantic, US West Texas Intermediate crude hit a 14-month low of $43.32 before recovering to $46.15, up $1.39, or 3.1%.

It was the first gain for both benchmarks after six sessions of losses triggered by coronavirus worries. The virus, which originated in China, has killed nearly 3,000 people and roiled global markets as investors brace for a steep knock to world growth.

Equities underwent their biggest rout since the 2008 financial crisis last week although European and Asian shares steadied on Monday.

“Everybody is afraid to miss the rebound in oil, metals and equities,” said Bjarne Schieldrop, chief commodities analyst at SEB Markets.

“Signs of monetary and fiscal stimulus as well as possible further production cuts from Opec+ later in the week are driving a rebound in both commodities and equities this morning.”

The scale of losses last week led financial markets to price in policy responses from the US Federal Reserve to the Bank of Japan, which indicated on Monday that it would take necessary steps to stabilise financial markets.

Data released over the weekend by China, the world’s top energy consumer, dragged on oil prices earlier in the session.

Factory activity in the country shrank at the fastest pace to date in February, underscoring the colossal damage from the coronavirus outbreak on its economy.

However, several key members of oil cartel Opec are mulling an additional production cut in the second quarter with fears the virus outbreak will erode oil demand. The previous proposal was for an additional output cut of 600,000 barrels per day (bpd).

Oil prices are down more than 20% since the start of 2020 despite Opec and its allies including Russia, a grouping known as Opec+, curbing oil output by 1.7-million bpd under a deal that runs to the end of March.

“Inaction by Opec+ would likely trigger another potentially severe bout of selling,” analysts at Fitch Solutions have said.

They said that although current prices would incentivise Russia to agree to further output cuts, they would be likely to be of a short duration, for example, three months, with the barrels brought immediately back to market thereafter.

Reuters