During the Asian session on Friday (March 6), international oil prices fluctuated and fell, always hovering at a three-year low. On Monday, they hit the lowest since June 2017 to US$43.32/barrel. OPEC’s secretary-general once again reassured that the group was committed to stabilizing the oil market, but it was still difficult to prevent oil prices from falling. As the public health situation continues to worsen and hits oil demand, OPEC’s further production cuts this year have become more urgent.
OPEC ministers proposed implementing the 1.5 million barrels per day production cut recommended earlier on Thursday until the end of the year, delegates said. Plans to cut production still depend on Russian support, which so far remains unclear.
Last month, the OPEC Technical Committee recommended extending the current production cuts until the end of this year and further reducing production by 600,000 barrels in the second quarter of 2020/ day. A survey released on Monday showed that 27 of 29 analysts and traders expected new production cuts, with the average expectation of a reduction of 750,000 barrels per day.
Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, said that there are many doubts about Russia’s cooperation, which has triggered concerns in the market and that oil prices are at risk of falling further.
OPEC tries to pressure Russia to cut production further
OPEC members proposed longer and deeper production cuts after informal talks at a hotel in Vienna, agreeing that they should be extended on Thursday The earlier proposed production cut of 1.5 million barrels per day lasted until the end of the year. Previous proposals, reached in formal ministerial talks, only suggested deeper production cuts in the second quarter.
OPEC ministers are trying to pressure Russia to join their production cuts, a high-risk move that could put oil prices at risk of collapsing if it backfires. Russian Energy Minister Alexander Novak remains opposed to the idea, insisting on keeping output at current levels until the end of the second quarter.
OPEC members have told Russia that if the latter does not join them in reducing production by another 1.5 million barrels per day to offset the economic impact of the public health incident, OPEC may abandon production cuts all together. Then the pressure on Russia was increased again, as evidenced by an informal meeting at the hotel where the Saudi delegation was staying, where a proposal was made to extend the production cuts for a longer period.
Despite OPEC Secretary-General Barkindo striking a conciliatory tone and praising Russia as a reliable ally, oil markets are bracing for more drama.
Brent crude oil settlement price fell below US$50 per barrel for the first time in nearly three years, an unprecedented stalemate since Saudi Arabia, Russia and more than 20 other countries formed the OPEC+ alliance in 2016.
The formation of this organization has supported oil prices and reshaped geopolitics in the Middle East, but it is now facing tremendous tension. The risk for the Saudis is that if their desperate move backfires, they could lose even more because they need higher oil prices to fund their budgets more than Russia does.
Amrita Sen, chief oil analyst at Energy Aspects Ltd., said, “If there is no positive answer from Russia, Saudi Arabia may be ready to leave.”
The impact of public health events on the oil market is “disproportionately high”
Fatih Birol, Director of the International Energy Agency (IEA), said that the impact of public health events on the oil market is “disproportionately high” because the risk affects Major disruptions to the transportation sector.
Fatih Birol issued written testimony at a congressional hearing in Washington on Thursday, saying, “It is clear that the public health incident is having a negative impact on global economic activity, and the International Energy Agency is monitoring the situation extremely closely.”
The International Energy Agency warned last month that this could lead to the slowest annual growth in oil consumption since 2011, but growth could still reach 800,000 barrels per day. Other analysts now estimate demand will shrink, with Goldman Sachs Group Inc forecasting lower consumption this year, which would be the fourth contraction in 40 years.
OPEC is seeking to further cut production in response to a 23% drop in oil prices so far this year. Were it not for the U.S. shale oil revolution, recent supply losses from Libya, Venezuela and Iran would have dealt a “painful blow” to the world economy.
A scenario described by the International Energy Agency assumes that increased U.S. production will cause the market share of OPEC members and Russia to decrease from 55% in the mid-2000s to 47% in 2030.
Institutions are bearish on crude oil demand
Goldman Sachs: OPEC’s production cut proposal cannot avoid an oil glut in the second quarter
Goldman Sachs analyst Damien Courvalin and others wrote in the report According to the report, OPEC’s proposal for the organization and its allies to cut production by 1.5 million barrels per day is not enough to prevent a glut in the global oil market in the second quarter.
Goldman Sachs expects oil prices to gradually fall in the coming weeks, and the proposal still needs to be agreed by Russia and other non-OPEC countries. Due to non-compliance by some countries, the nominal production cut of 1.5 million barrels per day may actually be 1.25 million barrels per day
In addition, due to the impact of public health events, demand in the crude oil market has been much weaker than expected in January, and has offset some of the production cuts. Ultimately, a rebound in demand, rather than a reduction in supply, will be the necessary catalyst for a sustainable rebound in prices.
The International Energy Agency will lower its oil demand forecast next week
Fatih Birol, Director of the International Energy Agency, said that the agency is lowering its oil demand forecast and that new data will be announced at a press conference in Paris next Monday. .
Public health events will have a negative impact on the market, especially the oil market, but also the coal and natural gas markets. The impact has been severe, mainly because the transport sector has been severely affected.
Birol said next Monday’s data will include a base case scenario that reflects the impact of the public health incident so far, as well as a worse-case scenario if the situation worsens.
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