The Fuse

Will OPEC+ Cut Again? Will It Be Enough?

by Nick Cunningham | March 02, 2020

The spread of the coronavirus is now expected to cut into global economic growth, with the possibility of a recession on the rise.

The steep drop in oil demand has ratcheted up the pressure on OPEC+ to take swift action. But several questions remain. Will Russia go along with the cuts? Will additional reductions be enough to balance the market? Will OPEC+ even be able to meet in Vienna in a few days’ time?

Moscow hesitates as oil demand weakens
After some waffling, Russia signed on to additional production cuts late last year, with the new OPEC+ agreement taking effect at the start of 2020. However, before the ink on that agreement was even dry, the coronavirus hit China hard, and Beijing’s decision to essentially quarantine tens of millions of people and shut down part of its economy resulted in a dramatic decline in oil consumption. Almost immediately, discussions about yet another round of OPEC+ cuts commenced.

Russian officials have repeatedly issued statements expressing skepticism about another deal. But by mid-February, the coronavirus began spreading rapidly beyond China’s borders. Last week, global markets finally began viewing the epidemic as a global crisis. Oil prices plunged.

Brent briefly fell below $50 per barrel in recent days, although has regained some ground. The sharp decline significantly increases the pressure on OPEC+ to act.

And yet, Moscow is still not fully on board. Russian President Vladimir Putin did not appear concerned about the decline in prices in comments made on Sunday. “I want to emphasize, for the Russian budget, for our economy, current oil prices are acceptable. Let me remind you that this year, as part of our macroeconomic policy, we took a Brent crude price of $42.40/b as the base level,” Putin said. “Moreover, our accumulated reserves, including the National Welfare Fund, are sufficient to ensure stability, and meet all budget and social obligations even with a possible deterioration of the situation in the global economy.”

That does not mean Russia will refuse to agree to deeper cuts. “Nevertheless, this does not negate the need for us to take action, including in conjunction with foreign partners,” he added.

The mixed comments add a bit of confusion as OPEC+ prepares to meet later this week. In February, Russian officials suggested that they might be willing to extend the current agreement, but did not want to cut deeper. But that was before the market meltdown in the last week of February.

Russia’s hesitations notwithstanding, many oil market analysts still predict the OPEC+ coalition to agree to another round of cuts. In early February, the OPEC Joint Technical Committee (JTC) recommended cuts of about 600,000 barrels per day (b/d). Since then, the market has deteriorated. A Bloomberg survey of 29 oil market analysts finds that all but two of them see new cuts in the offing. The size of the cuts predicted by the analysts ranged from 300,000 b/d to 1.5 million barrels per day (Mbd), with an average of 750,000 b/d.

Will it be enough? That remains to be seen. “In view of the latest developments on the demand side, this will probably no longer be sufficient to stabilise the market,” Commerzbank wrote in a note on Monday.

The impact on demand from the spread of the coronavirus is highly uncertain. The OECD lowered its global GDP forecast to 2.4 percent, the weakest rate of growth in a decade. For oil demand, analysts are revising down their 2020 figures by the day. As recently as January, the International Energy Agency (IEA) forecasted demand growth of 1.2 Mbd this year. A month later, the agency cut that figure to 825,000 bpd.

That number is both the weakest in a decade and also, at this point, appears to be overly-optimistic.

Some analysts even see demand growth falling to zero this year. FGE, a consultancy, said oil consumption may see no growth this year. “We could literally now be looking at potential oil demand loss globally of several million barrels a day for several months,” FGE Chairman Fereidun Fesharaki told Bloomberg. Companies and traders have now lowered many estimates to be between 200,000 b/d and 700,000 b/d, according to Bloomberg.

Deeper OPEC cuts…with or without Russia
There are still decent odds that Russia ultimately signs on to production cuts. Still, the meeting is shaping up to be one with a lot more drama compared to the past few times they have met in Vienna.

One possible outcome could be Saudi Arabia and its Gulf State allies making deeper cuts even if Moscow balks. “According to two well-informed sources, OPEC is allegedly willing to cut production more sharply, with or without Russia’s participation,” Commerzbank said. “To achieve the desired additional reduction of 1 million barrels per day, Saudi Arabia may offer to top up the aforementioned joint cut of 600,000 barrels by a further 400,000 barrels – providing that the other countries cut as promised.”

Bank of America Merrill Lynch slashed its oil price forecast by $8 per barrel, lowering its Brent estimate to an average of $54 for 2020, and WTI to just $49. The bank said the “silver lining” was that OPEC+ will “likely” cut output “while US oil supply growth could fall to just 500k b/d YoY in 2020.”

One final bit of uncertainty: There are questions about whether or not OPEC+ will even meet in Vienna in the next few days. The coronavirus is spreading across Europe, and top officials in the Iranian government have been personally affected. The IHS CERAWeek Conference in Houston, which was set to start on March 9, was cancelled because of the virus.

As of Monday, the meeting in Vienna is on. “So far, there is no change to the scheduled meetings this week,” an OPEC source told Argus Media.