Opec Agrees Further Cuts as Covid-19 Bites (Update)
(Adds comment from Rystad)
Oil exporting countries' group Opec has agreed to extend the December 6 cuts in oil production until the end of the year, it said after an extraordinary March 5 meeting in Vienna. The price of Brent crude oil closed the day before at $51.13/barrel, down some $20/barrel since the price spike at the turn of the year.
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Opec has also recommended an additional cut of 1.5mn barrels/day (b/d) until June 30, split between Opec (1.0mn b/d) and non-Opec producing countries (0.5mn b/d). So far Russia, the biggest producer of the non-Opec group, has not said if it will go along with the cuts. An agreement may be reached after talks with Russia March 6.
In its statement, Opec said the Covid-19 outbreak "has had a major adverse impact on global economic and oil demand forecasts in 2020, particularly for the first and second quarters. Global oil demand growth in 2020 is now forecast to be 0.48mn b/d, down from 1.1mn b/d in December 2019. Moreover, the unprecedented situation, and the ever-shifting market dynamics, means risks are skewed to the downside."
Opec members said that a stable and balanced oil market was in the interests of producers, consumers and the global economy. The next ordinary meeting will take place June 9. Incidentally, September marks the 60th anniversary of the founding of Opec in Baghdad in 1960.
Consultancy Wood MacKenzie said that members' compliance with the cuts "probably won't be full, but even moderate adherence should be enough to stabilise the market through the second quarter.” However, "if the demand loss we are experiencing continues into the second quarter, the group may need to revisit the cuts and reassess them."
WoodMac expects world oil demand to fall 2.7mn b/d in the first quarter: "This is a massive drop, and it shows the scale of the problem Opec+ faces," it said. “China’s demand alone is expected to fall by 2.3mn b/d in the first quarter."
It added: “Whether Russia will agree to the cuts is the million-dollar question. Russia hasn’t signed on yet and as the leader of the non-Opec group, their agreement is key. Given their history of co-operation with Opec, we expect they will agree. Russia could, at the very least, hold production flat during the second quarter.”
Norwegian consultancy Rystad said that it doubted if the cuts would be enough to balance the supply-demand gap and shield oil prices. "Even though Opec+ is already tremendously over-complying on cuts agreed upon in December 2019, it’s not enough to counter the demand destruction of Covid-19,” it said.
At least 2mn b/d of supply need to be removed from second quarter balances if Libya’s shut-in 1.1mn b/d production comes back online. The supply overhang from the first quarter will also have to be worked down before a recovery in price can manifest, it said.
According to its analysis, February’s crude demand dropped by a "shocking" 4.6mn b/d, led by a 2.9mn b/d month-on-month drop in Chinese crude runs.