Oil surges more than 4% in best day since September as hopes of OPEC cut counter virus gloom

A kayaker passes in front of an offshore oil platform in the Guanabara Bay in Niteroi, Brazil, Saturday, Feb. 1, 2020.
Dado Galdieri | Bloomberg | Getty Images

Oil prices rose on Monday, reversing an earlier fall to multi-year 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 rose 4.3%, or $2.20, to trade at $51.87 per barrel. U.S. West Texas Intermediate crude gained $1.99, or 4.45%, to settle at $46.75 per barrel. 

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.

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

"The comments of Russian President Vladimir Putin, that Russia will keep cooperating with OPEC and its allies, are also helping ahead of the important oil producer meetings at the end of this week," UBS oil analyst Giovanni Staunovo said.

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 ever in February, underscoring the colossal damage from the coronavirus outbreak on its economy. .

However, several key members of the Organization of the Petroleum Exporting Countries (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 bpd.

Russian Energy Minister Alexander Novak said on Monday that Moscow is evaluating the smaller oil production cut proposal made by OPEC+, adding it had not received a proposal for deeper cuts.

OPEC oil output fell in February to the lowest in over a decade as Libyan supply collapsed due to a blockade of ports and oilfields and Saudi Arabia and other Gulf members overdelivered on a new production-limiting accord, a Reuters survey found.

Oil prices have fallen more than 20% since the start of the year 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 likely be of a short duration, for example, three months, with the barrels brought immediately back to market thereafter.