OPEC+ will Consider Deeper Cuts in Face of Lingering Coronavirus Threat

OPEC and its allies are slated to deepen their output cuts as they gather in Vienna this week to tackle an alarming slide in oil prices and stave off reverberations of the coronavirus that has disrupted global trade and undercut demand for crude.

The rapid spread of Covid-19 led to a sell-off across stock markets. wiping out nearly $7 trillion (Dh25.7tn) globally in the past week. the worst decline since the 2008 financial crisis. As factories in China. the world`s largest importer of oil. came to a standstill. markets plunged. G7 finance ministers will hold a teleconference on Tuesday to co-ordinate their response to the outbreak. which may see an injection of liquidity by central banks and cut of interest rates to stabilize markets.

Brent started the year on a high. following geopolitical escalations in the Middle East as well as a commitment by OPEC+ to withdraw 1.7 million barrels per day for three months from January. However. the international benchmark. which had topped $68 per barrel at the beginning of the year. fell below the $60 threshold by the end of January and has lost further ground since then.

Brent and West Texas Intermediate. the North American benchmark shed 13 and 16 per cent over the course of the week – marking the steepest weekly decline since the 2008 credit crisis. Opec`s Gulf Arab members led by Saudi Arabia have been calling for an early meeting. but Russia`s reluctance has led to the group`s general inaction until their scheduled summit on March 5 and 6.

Ahead of the meeting. both oil benchmarks recouped some of their losses. with Brent was up 2.16 per cent at $53.02 a barrel while West Texas Intermediate was 2.25 per cent higher at $47.8 a barrel at 8.55am UAE time.

At their upcoming meeting. the producers could agree to cut back 600.000 bpd to 800.000 bpd. raising the overall production restrictions to between 2.7 million bpd and 2.9 million bpd. including voluntary commitments from Saudi Arabia. according to a note by Abu Dhabi Commercial Bank.

At OPEC`s annual meeting in Vienna. Riyadh pledged additional commitments of 400.000 bpd to help balance the markets.

`Indications are that Saudi Arabia and some other countries are looking for a 1 million bpd output cut for Q2. 2020 amidst weakening global demand.` said Monica Malik. chief economist at ADCB.

`The joint technical committee earlier proposed a 600.000 bpd cut in early February. which Russia refused to endorse. However. this week Russia outlined its support for an output cut to bolster the oil market. This meeting is critical for the cohesion of OPEC+.` she added.

The meeting this week is likely to see Russia agree to deeper cuts. even as Moscow remains comfortable with current prices.

Russian President Vladimir Putin called the OPEC alliance an `effective tool` in ensuring the long-term stability of the oil markets and said the country would co-operate with other producers in any action.

The upcoming meetings are likely to be fractious. said Giovanni Staunovo. commodity analyst at UBS. particularly over the size of cuts and the quotas for member and non-member producers. However. with talk of the global economy entering a recession and economists forecasting a slow down after the International Monetary Fund cut its estimates on growth in China. OPEC+ is likely to agree to such an action. A lack of consensus would likely push oil prices down even more.

`The group will agree to cut production by at least 500.000 bpd in Q2 and extend the current deal into [the second half]. with a review of terms in June. The latest talks suggest a higher cut than just 500.000 bpd.` said Mr Staunovo.

An OPEC+ technical committee. which convened in February recommended keeping the current restrictions of 1.7 million bpd through until year-end with a short-term deepening of cuts by 600.000 bpd until the end of the second quarter.

UBS expects Brent. to recover above $60 per barrel in the second half supported by improved demand. OPEC+ action and slowdown in US shale production.

 

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