Coronavirus may force OPEC oil production cut
The cuts may set a 'temporary floor' in prices
OPEC and its allies are considering whether to reduce crude output to curb an oil supply glut exacerbated by the new coronavirus.
The group will meet in Vienna on Thursday and Friday to discuss economic damage from the excess supply amassed as COVID-19 hampered global travel.
Both Brent crude oil, the international benchmark, and West Texas Intermediate, the U.S. benchmark, have plunged into bear markets, with drops of more than 20 percent from their January peaks, as the fast-spreading COVID-19 caused the lockdown of hundreds of millions of people in China.
“We expect OPEC+ to agree to an emergency output cut of an additional 1 million barrels per day for at least the next three months at its meeting later this week,” wrote Samuel Burman, assistant commodities economist at the London-based research firm Capital Economics. “This should, at a minimum, put a temporary floor under prices.”
GOLD TO BOOM AFTER FED'S CORONAVIRUS RATE CUT
Global oil demand has been hit hard by the COVID-19 outbreak, especially in China, which according to the International Energy Agency accounted for three-quarters of demand growth in 2019. The agency expects worldwide demand to be 435,000 barrels a day lower than a year earlier during the first quarter of 2020. The drop would be the first quarterly contraction in 10 years.
OPEC’s technical committee recently discussed a 600,000 barrel-per-day cut, but that number has been raised to 1 million because of the sharp drop in prices. OPEC and its allies have already removed a total of 1.7 million barrels a day from the market since January 2017.
“Saudi Arabia will undoubtedly continue to bear the lion’s share of any additional output cuts,” Burman wrote, noting that the kingdom already is shouldering the load of 400,000 barrels per day of voluntary cuts. “We think OPEC’s allies will agree to some form of supply constraint to avoid damaging relations with Saudi Arabia.”
Capital Economics believes the additional output reductions would merely prevent a “further fall in prices” rather than giving them a “sustained boost.”
Meanwhile, Bank of America’s Global Commodity Research team on Sunday lowered its 2020 price forecasts for both Brent and West Texas Intermediate to $54 and $49 a barrel, respectively, down from $62 and $57, due to fading gross domestic product growth caused by the COVID-19 outbreak.
GET FOX BUSINESS ON THE GO BY CLICKING HERE
Brent and WTI were both trading higher by about 2 percent Wednesday morning, near $53 and $47 per barrel respectively. West Texas Intermediate touched a 14-month low on Monday.