Energy markets and related ETFs slipped Friday as Saudi Arabi considers breaking off its four-year alliance with Russia as the spreading coronavirus outbreak impedes economic activity and pulls down oil demand.
Among the worst performing non-leveraged ETFs on Friday, the Invesco S&P SmallCap Energy ETF (NasdaqGM: PSCE) decreased 4.8% and SPDR Oil & Gas Equipment & Services ETF (NYSEArca: XES) fell 4.0% while the broader Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, was 1.4% lower.
Meanwhile, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, declined 0.9% and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, dropped 1.5% as WTI crude oil futures dipped to $53.4 per barrel and Brent crude was down to $58.5 per barrel.
In light of falling oil prices, the Saudi kingdom, Kuwait and the United Arab Emirates, which combined make up over half of OPEC’s production capacity, convened this week to discuss a possible output cut of as much as 300,000 barrels a day, the Wall Street Journal reports.
A “300,000-bpd cut would only partially compensate for the lost demand as a result of the coronavirus epidemic,” Marshall Steeves, energy markets analyst at IHS Markit, told MarketWatch. “The extent and duration of lost demand remains to be seen given that the outbreak has yet to peak and it isn’t clear when that might happen.”
As coronavirus outbreak intensifies, a rift has grown between the partnership of Russia and the Saudi-led Organization of the Petroleum Exporting Countries. If the Saudis, Kuwait and the U.A.E. break with the Russians, the divided would further weaken the cartel’s ability to support oil prices.
The OPEC-Russia alliance showed cracks at an emergency meeting earlier in February when Russia rejected a Saudi proposition to further diminish oil production by 600,000 barrels a day. Russian officials argued that there wasn’t a need for reductions, according to the people familiar with the matter, as they point to recovering business activity in China and argue that the impact of the virus on oil demand is limited.
The International Energy Agency has already warned that demand for oil is likely to fall 435,000 barrels per day for the current quarter year-over-year. Vitol Group, the world’s largest independent oil trader, also reduced its projected demand for the quarter to 98.3 million barrels per day, or 2.2 million barrels a day lower from its prior expectations.