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The OPEC+ joint technical committee asked China on Tuesday to help it assess the demand loss from the coronavirus outbreak, as OPEC and its allies are struggling to contain an oil market meltdown over the virus.
With oil prices falling into a bear market earlier this week, having dropped by more than 20 percent since a high in January, delegates from OPEC+ countries gathered in Vienna on Tuesday to discuss in an emergency meeting how the cartel and its allies should respond to the fast drop in prices.
The OPEC+ panel invited Wang Qun, China’s ambassador to international organizations in Vienna, to attend a closed-door meeting to helps assess the demand destruction. According to OPEC officials who spoke to Bloomberg, Wang told the committee delegates that China expects the virus impact would be localized and limited, and warned against overreaction.
As of early Wednesday, the coronavirus had already claimed 492 lives worldwide, mostly in China, and had infected more than 24,500 people in 25 countries. China’s oil demand amid the coronavirus outbreak is likely inflicting the worst oil demand shock to markets since the financial crisis of 2008-2009 and refiners are cutting refinery runs amid weak fuel demand.
The OPEC+ panel did not discuss cuts on Tuesday, but it continues the meeting on Wednesday. The meeting, according to Bloomberg’s sources, showed the usual power play seen at all OPEC+ meetings so far—OPEC’s largest producer Saudi Arabia pushing for more cuts, while Russia—the leader of the non-OPEC group of producers part of the deal—pushing back.
The Saudis are pushing for an additional cut of at least 500,000 bpd and even 1 million bpd, delegates told Bloomberg.
Meanwhile, Russia’s Energy Minister Alexander Novak told reporters in Russia on Tuesday that Russia was ready to move up the March OPEC+ meeting to February, but added that only a careful assessment of demand drop would inform the coalition whether further cuts are needed.
OPEC’s own analysis at the panel meeting showed a 400,000-bpd drop in global oil demand growth over six months, delegates at the Tuesday meeting told Bloomberg.
Commenting on the need of additional cuts, ING strategists said on Wednesday:
“If we assume that OPEC numbers are correct, and then factor in the supply losses we are seeing from Libya at the moment, and assume that these last through until the end of Q1, 500Mbbls/d of additional cuts should be almost enough to balance the market over Q1, whilst over Q2 we would likely need to see current cuts of 1.7MMbbls/d rolled over through until at least the end of June.”
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.
Saudi Arabia’s sudden enthusiasm for deepening the cuts could be motivated by two major factors.
The first is that it badly needs to stop oil prices falling as this adversely affects its economy and expands the budget deficit. Saudi Arabia needs an oil price of $80-$85 a barrel to balance its budget.
The second reason could be that its production is declining anyway as a result of fast depletion in the five major oilfields including Ghawar the world’s largest, that underpin its production. So by encouraging deeper cuts it hides natural declines in its production.
Russia is not keen on further deeper cuts because its economy can live with an oil price of $40 or less.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London