With oil demand taking a hit due to the massive outbreak of COVID-19 Novel Coronavirus, OPEC contemplates its biggest oil production cut since the global financial crisis of 2008.
The Organization of the Petroleum Exporting Countries (OPEC) has decided to cut down the oil output by an extra 1.5 million barrels per day (bpd). The decision is to support the oil prices that have been hit by the coronavirus outbreak. Saudi Arabia and other OPEC countries have made their actions conditional on Russia joining it.
Lower oil demand forecasts
Following measures taken to prevent the spread of the COVID-19 Novel Coronavirus, the oil demand across the planet has been severely hit. As a result, this has prompted the OPEC to contemplate its deepest oil cut since the 2008 global financial crisis. With factories being closed, businesses getting disrupted and restrictions on mass gathering of people; oil demand forecasts for the year have been cut down.
Highlights! Will the coronavirus outbreak lead to the biggest oil production cut?
- OPEC plans to cut down oil production by an extra 1.5 million bpd.
- Oil consumption in China has rapidly gone down amid the COVID-19 outbreak.
- Russia is willing to agree to extend existing cuts, but unwilling to sign to deeper cuts.
OPEC plans cutting oil output
A technical panel of representatives from OPEC, Russia and other oil producers have recommended cutting oil output by 0.6-1.0 million bpd during the second quarter of 2020. The panel also suggested that an existing cut of 2.1 million bpd by OPEC+ shall be extended to the end of 2020.
As per sources, Russia is willing to extend existing cuts, which expires in March, but might be unwilling to sign to deeper cuts. “OPEC hopes for a cut bigger than 1 million but the challenge is still Russia,” an OPEC source quoted.
Saudi Arabia slashed its crude prices over the weekend and pledged to ramp up production in retaliation against Russia for refusing to join OPEC in large production cuts as the #coronavirus continues to crush oil demand https://t.co/v1B14WvcBA pic.twitter.com/o2wRt5KxiY— Reuters (@Reuters) March 10, 2020
In a statement after a meeting of its ministers, OPEC said that the coronavirus outbreak created an “unprecedented situation”. The risks are “skewed to the downside”, and actions are needed. According to OPEC, the ministers agreed to an extra supply cut of 1.5 million bpd until June. 0.5 million bpd of this supply cut is expected to be contributed by non-OPEC countries. This was in addition to extending existing supply restrictions to the end of 2020.
The worst-case scenario
Earlier in Vienna, OPEC had a preliminary discussion with Russia regarding the oil cuts. “The worst-case scenario is an extension,” said an OPEC source when asked about Russia’s refusal to join oil production cut.
“OPEC+ have little choice but to cut output substantially given the virus-related demand losses. Russia will join because it is overwhelmingly in their economic interests. ” – Gary Ross, the founder of Black Gold Investors
Suhail al-Mazrou, the energy minister of UAE, said that non-OPEC countries will need to join the OPEC states. Everyone will need to share the burden of oil cuts.
“We are all in this together. So it’s not going to be us (OPEC) making a decision alone.” – Suhail al-Mazrou on both OPEC and non-OPEC states sharing the burden of oil cuts
Biggest oil production cut
If approved, the proposed OPEC cut would be well above what the market had expected. If OPEC+ decides to cut an extra 1.5 million bpd, it will bring the group’s overall output reduction to 3.6% of global supplies. The last instance of OPEC reducing supplies on such a scale was in 2008. A production cut of 4.2 million bpd in total happened in 2008. The production cut was to counter lesser demands due to the global financial crisis.