After deliberations, Russia appears set to support Saudi Arabia in the push for deeper production cuts.
OPEC’s Joint Technical Committee met on Tuesday, and it was only supposed to be a two-day affair. The expectation was that the JTC would conclude that the oil market was oversupplied and that OPEC+ should cut more. But Russia was unconvinced and asked for more time. The talks stretched on, and the prospect of the negotiations ending with no result sent oil prices down towards the end of the week.
But Russia’s top diplomat ended the week by voicing support for more production cuts. The leading idea is another 600,000 bpd in cuts, which come a little more than a month after OPEC+ introduced the last round of cuts following the December meeting in Vienna.
The problem that some analysts have raised is that while the demand hit from the coronavirus is really deep, but it may only be temporary. China’s oil consumption, by some estimates, is off by a massive 3 million barrels per day (mb/d). That’s a huge hole in the market that, on its face, almost certainly would force OPEC+ to act. But if the virus is contained, demand could return quickly. By the time OPEC+’s new cuts are phased in, China could be back to normal.
Still, with Brent down below $55 in recent days, OPEC+ (and especially Saudi Arabia) feels that they need to take action. In a worrying sign for the market, Russia’s support for more cuts did little for crude prices on Friday.
The longer-than-expected deliberations in Vienna may delay the ministerial meeting that would finalize the reductions. Prior to the JTC meeting, the rumor was that the full forum would convene as early as next week. At the time of this writing, nothing had been scheduled yet.
The coronavirus is still raging (although the rate of spreading is showing signs of slowing), and global oil demand has taken a significant hit. But the severity and duration of the slowdown is incredibly unclear.
There is “a wide range of outcomes on different timescales still possible,” JBC Energy wrote in a note. “The difference for OPEC+ is that its supply taken as a block is arguably significantly less responsive than refiners and their purchasing behaviour over a period of days to weeks, meaning there is more of a risk of over-cutting (or under-cutting, though less likely as far as we see it) what the market will actually end up needing, at least for short periods of time.”
The firm said that as of now, it sees demand growing by 750,000 bpd in 2020, which is about the same as what occurred last year. “So, again pretty weak,” JBC wrote.
Meanwhile, Libya still has 800,000 bpd offline, “which continues to be largely under-reported/under-appreciated in the oil sphere,” JBC concluded.
Energy markets are in turmoil, even as broader equities are moving on. “While the (Western) stock markets appear to have already overcome the ‘coronavirus crisis’ again and in some cases have achieved new all-time highs, the concerns on the oil market are likely to persist for some time yet,” Commerzbank wrote. “This is because China and its imports are simply too important in terms of the global oil market for the massive decline in demand and possible medium-term consequences (e.g. continuing transport restrictions and reduced new car registrations) to be ignored, even if the coronavirus epidemic can be contained effectively.”
That helps explain the muted reaction to the news that OPEC+ would be cutting deeper. The cuts are “hardly likely to be enough to drive prices up,” Commerzbank said. The drop in Chinese demand, after all, “is considerably higher” than what OPEC+ is proposing.
Oil closed out the fifth consecutive week of losses on Friday.
By Nick Cunningham of Oilprice.com
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