OPEC and its ‘friends’ are due to meet in Vienna later this week and high on the agenda will be the question: should we cut output deeper after the huge slide in prices last week on growing fears about the impact on demand from the COVID-19 virus?
The answer seems to be ‘yes’ but how deep should we cut?
The answer is very likely to be yes, with only the question of the size and duration of the cut to be decided.
The terrible reading of Chinese manufacturing activity for February f 35.7, down from 50 in January, suggests the world’s biggest buyer of oil is in or heading towards a very sharp slowdown and even recession.
Before the first survey from the National Bureau of Statistics was released on Saturday, oil futures finished fell sharply on Friday, with the US benchmark West Texas Intermediate prices down over 16% for the week, the largest weekly decline in more than 11 years. Brent crude futures fell nearly 14% over the week as well.
The continuing the spread of the COVID-19 epidemic around the world is now widely expected to significantly dent demand for crude in coming months, especially from China.
West Texas Intermediate crude for April delivery dropped $US2.33 on Friday, or about 5%, to settle at $US44.76 a barrel in New York. The 16%plus slide was the largest weekly decline since the period ended December 2008 (when the GFC was intensifying), according to Marketwatch.com.
For the month, the front-month contract fell 13% lower (The contracts for WTI and Brent both rolled over at settlement on Friday).
The global benchmark April Brent crude futures contract fell $US1.66 on Friday, or 3.2%, to settle at $US50.52 a barrel.
It was the largest weekly loss since the period of January 2015. The front-month contract fell by just over 13%.
Industry analysts said the tumble puts increased pressure on the OPEC and their allies as they prepare to meet this week to discuss the possibility of additional production cuts in a bid to balance supply and demand.
Saudi Arabia is reportedly pressing for more cuts, but Russia, which needs oil revenue, is not as willing as it was the join the two previous production cuts.
Saudi Arabia has also reportedly slashed exports to China by 500,000 barrels a day, industry reports claimed on Friday. That’s not much when Chinese imports total well over 9 million barrels a day, but it is a sign of the pressures now at work in the industry.
A committee made up of representatives of OPEC members and its allies, a grouping known as OPEC+, previously recommended extending current cuts of 1.7 million barrels a day to the end of the year, and suggested the implementation of an additional cut that would run until the end of the second quarter. That extra cut was widely reported as 600,000 barrels a day.
The Saudis though are reported to be looking for a cut of a million barrels a day from OPEC and its mates. No wonder Russia is wary because it would be asked to shoulder a big part of that extra capacity reduction.
“We now believe the group needs to make much steeper cuts than the 600,000 barrel-a-day recommendation from their technical committee to support prices,” said Jason Gammel, an analyst at Jefferies.
“At least a 1 million barrel-a-day cut for 2Q strikes us as necessary to merely moderate inventory builds, and we confess to underestimating demand destruction over the last several weeks,” he said, in a note.
