Oil prices extend losses amid oversupply concerns, coronavirus demand risks

Crude oil prices extended decline in the US mid morning trading Wednesday as as oversupply concerns and the potential downside demand impact of a fast-spreading global flu outbreak weighed on prices.

At 1556 GMT ICE March Brent was down $1.14 at $63.45/b and NYMEX March WTI was $1.20 lower at $57.18/b.

"Oversupply concerns are mitigating any rallies that we see with Middle East tensions," OANDA senior market analyst Edward Moya said. "There is still just no strong catalyst here for a sustained higher move with crude prices."

A Libya National Army blockade over the weekend shut in nearly 1 million b/d of Libyan crude exports, briefly sending Brent futures higher Monday, but the rally was short lived amid ample global supply. The disruption, which itself is likely temporary, could be more than accounted for by the voluntary production cuts undertaken by the so-called OPEC+ group. OPEC and 10 other countries led by Russia agreed in December to slash output by a collective 1.7 million b/d in January through March, after cutting 1.2 million b/d for the last year.

Saudi energy minister Abdulaziz bin Salman Al Saud, speaking at the World Economic Forum in Davos, Switzerland, Wednesday, lauded OPEC's attentiveness to global markets and ability to manage any potential supply shortfalls (See story 1234 GMT.)

"We're vigilant of what is happening. The market sees that there is an attendance to this market, responsible, responsive attendance," he said.

US crude supply is expected to edge around 500,000 barrels higher in the week ended January 17, according to Platts' Tuesday survey, further mitigating the global supply risk.

"Markets are convinced we are not going to see sustained move here in oil unless we have prolonged disruption," Moya said " It seems like that's not going to take place."

NYMEX February ULSD was down 3.56 cents at $1.7936/gal and February RBOB was 4.13 cents lower at $1.5952/gal.

The spread of coronavirus beyond China's Wuhan city was adding additional headwinds to oil prices Wednesday.

The outbreak could reduce global oil demand by 260,000 b/d, including a 170,000 b/d loss of jet fuel demand if air travel is impacted, Goldman Sachs analysts said in a report late Tuesday. This in turn translates into a $3/b impact on benchmark oil prices, although a knee-jerk reaction could push prices lower, the bank said.

Price reaction in prompt-dated NYMEX Singapore jet futures has been muted, but an unseasonal backwardation structure has opened in the forward curve. On Monday, the front-month premium to second-month widened to $2.23/b, the strongest since late-May. This time last year the front- to second-month spread was around minus $2.50/b.

A major factor in the overall impact of the virus on oil markets could be the extent to which it disrupts travel ahead of the Lunar New Year holiday, analysts said. Notably, as of Wednesday the World Health Organization has not recommended any restrictions to travel or trade.

"The trade is trying to gauge the potential for oil demand destruction if fears about the spread of the virus increase," Price Futures Group senior market analyst Phil FLynn said in a morning note. "Oil traders have good reason to worry because after the sars virus, we saw a significant drop in oil demand. People did not fly and stayed home fearing the infectious disease."