A remedy for OPEC+

Thursday, 2020-02-06 17:32:57
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The logo of the Organisation of the Petroleum Exporting Countries (OPEC) sits outside its headquarters. (Photo: Reuters)
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NDO – Oil prices have declined by US$10 over the past month and may fall even further amid the acute respiratory illness caused by a new strain of corona virus (2019-nCoV) which is raging around the globe. This fact forced the Organisation of the Petroleum Exporting Countries (OPEC) and allied countries, known as OPEC+, to consider cutting production. However, analysts are concerned that this “remedy” from OPEC is difficult to implement to help the price of “black gold” to go up soon.

OPEC+ is considering conducting a ministerial meeting on February 14 and February 15, earlier than it was originally planned in March. At the same time, OPEC+ is also considering cutting oil output by 500,000 barrels per day due to 2019-nCoV.

The above information was given in the context that the epidemic caused by nCoV has weakened the “health” of the Chinese economy and "shadowed" the prospect of the global economic growth. According to economists’ estimates, the epidemic caused US$144 billion in damage to the country’s tourism, service and entertainment industries during seven days of the Lunar New Year holiday. Even with the best possible outcome, even if the epidemic can be put to a stop by April, China’s GDP growth will still decline from 6.1% in 2019 to 5.4% this year. If the epidemic lasts longer than expected, China's economic growth may be estimated at only 5%. A series of important economic sectors of many other countries such as aviation, tourism and trade have also become “victims” of nCoV. Accordingly, the weak economy will reduce the demand for oil and push the price of "black gold" down. Since the epidemic broke out, from the beginning of 2020 until now, oil prices have dropped by US$10 per barrel, to US$56 per barrel, much lower than many OPEC member countries need to balance their respective budgets.

According to analysts, the acute respiratory illness caused by a new strain of corona virus could reduce oil demand by more than 250,000 barrel per day in the first quarter of this year. On February 3, Iranian Oil Minister B. Zanganeh said that the spread of the disease had affected oil demand and urged oil exporting countries to make efforts to balance the market. The OPEC and non-OPEC Joint Ministerial Monitoring Committee said its meeting on February 4 and 5 in Vienna (Austria) was to assess the impact of nCoV on oil demand, in order to devise solutions to support the market.

However, analysts are concerned that this “remedy” from OPEC will hardly help oil prices to move up anytime soon. The International Energy Agency (IEA) warned that that cutting of production of OPEC and its allies may still not be enough to end the global oversupply. By the end of 2019, OPEC+ agreed to cut oil production by 500,000 barrel per day and the adjustment took effect from January 1, 2020. With this decision, the new oil production would be less than 1.7 million barrels a day compared to the output in October, 2018. However, the IEA estimated that the commitments made by OPEC+ will only help reduce oil production by 530,000 barrel per day from November output. Meanwhile, the IEA forecasts that oil production in the global market may increase 0.7 million barrel per day in the first quarter of 2020. Even if OPEC+ comply with their commitment to reduce production, there is a possibility that oil inventories will continue to increase sharply in the first half of 2020. Meanwhile, in the context of the ongoing trade war and nCoV “shadowing” on he global economic prospects, the IEA lowered its oil demand forecast next year to 101.5 million barrels a day, a decrease of 0.1 million barrels a day.

Another challenge with OPEC+'s determination to reduce oil production is that the amount they cut production appears to be “a drop in the ocean” compared to the amount of oil that the US has pumped into the market. The US Energy Information Administration (EIA) has said that, the US is on track to become a net exporter of crude and fuel for the first time on record on an annual basis in 2020. US crude oil production is expected to rise by 930,000 barrels per day to a record 13.18 million barrels per day next year, the EIA said, slightly below its previous forecast for a rise of 1 million barrels per day. Net exports of crude oil and petroleum products are expected to average 570,000 bpd in 2020, the EIA stated. In addition to the increasing supply of oil from the US, they’re not many analysts who believe that countries like Iraq and Nigeria will comply with the agreement to cut production in a thorough manner.

It seems that the “black gold” market prospect has yet to overcome long-term challenges. Oil exporters' hope the increase of oil prices has become even more gloomy in recent days as the global outbreak of the acute respiratory illness caused by a new strain of corona virus.