A 20 percent plunge in oil prices this year since the coronavirus outbreak took hold has alarmed the world’s top oil officials, and their challenge to prop up prices keeps getting harder.
Leaders from the OPEC nations and Russia are gathered in Vienna this week to halt the slide, with high stakes and few good options. Russia, so far, is resisting production cuts aimed at stabilizing prices.
IHS Markit, a research firm, estimated that demand for oil would fall by 3.8 million barrels a day, or about 4 percent of world supplies, over the first three months of this year — the largest quarterly drop in demand the researchers had ever seen, exceeding declines during the 2008 financial crisis.
While economic activity has begun to recover in China, travel for tourism and business has slowed sharply and supply chains and manufacturing are under tremendous pressure.
Evaporating global demand makes the job even harder for the Organization of the Petroleum Exporting Countries, whose headquarters are in Vienna.
“This is a major meeting similar to the financial crisis,” said Gary Ross, president of Black Gold Investors, a trading firm.
Facing this grim outlook, the delegates would seem to have little choice but to pile further cuts on top of the already previously agreed curbs of 2.1 million barrels a day, or about 2 percent of global oil supplies.
The petroleum revenues that governments like Saudi Arabia and Algeria depend on are shrinking fast. Reducing supply is the producers’ only route to bolstering prices and income. Cuts, though, will most likely mean a continued erosion of OPEC’s share of the world market — at 35 percent, its lowest level in decades — as producers outside the cartel, especially shale drillers in the United States, continue to increase their output.
On Wednesday, Russia, which has cooperated with OPEC for the last three years, balked at making more cuts at a preliminary meeting, Reuters reported, sending prices for Brent crude down by more than 1 percent to $51.26 a barrel.
Even without a formal cut by OPEC and Russia, exports have already plummeted from Venezuela, Libya and Iran without supporting oil prices. An escalating civil war in Libya in recent weeks has cut up to a million barrels of oil a day from the market.
Venezuelan daily production declined by more than 600,000 barrels in 2019, and tightening American sanctions are expected to reduce production by a further 25 percent, or 200,000 barrels, by the end of this year. Iranian oil exports, once a mainstay of oil markets in Asia, were reduced to a trickle of 300,000 barrels a day even before the spread of the coronavirus.
With those three OPEC countries already suffering an oil production downturn, it would take an additional cut of one million barrels a day to make any meaningful difference to the market, according to a report by S&P Global Platts Analytics on Wednesday.
Recent and future production cuts from OPEC members are being replaced by increased output from other countries, particularly the United States, Norway and Brazil. Any support for prices that OPEC can manage will help struggling American oil companies to keep up production, and further expand exports.
When the financial crisis slammed demand in 2008, OPEC announced cuts of 4.2 million barrels a day, or about 6 percent of supply at that time. Mr. Ross said he expected a substantial cut this time around.
“They have to shock the market to support prices; they will do it,” he said.
The probability that the group would agree to cuts appeared to increase Tuesday after a technical committee recommended daily trims of 600,000 to one million barrels. Reflecting traders’ optimism about reduced supply, prices for Brent crude, the international standard, rose on Wednesday morning, before backsliding later in the day.
But Russia continues to hold out. In the past, Russian officials have said that more time is needed to evaluate an uncertain situation.
Amrita Sen, chief oil analyst at Energy Aspects, a market research firm, said OPEC was preparing a cut of one million barrels or more. She said even a cut of that size was unlikely to lift prices, but it might stabilize them. OPEC’s aim at this meeting, she said, was to make sure that a huge surplus of oil does not build up at tank farms and on ships across the world that might weigh on the market for months if not years.
The officials, she said, want to “ensure that inventories don’t build so far that they can’t run them down.”
Bjornar Tonhaugen, head of oil market research at Rystad Energy, a research firm, said that a cut of a million barrels a day would roughly balance the market but only as long as Libya failed to restart production.
“The market would not be pleased” with one million barrels a day, he said. Prices would probably “not collapse further immediately, but it won’t be enough to get prices going upward much.”
The outcome of the meeting may turn on whether tensions in the alliance between Saudi Arabia, OPEC’s de facto leader, and Russia, a major producer, can be papered over.
With the gravity of the coronavirus outbreak becoming apparent, Saudi Arabia’s oil minister, Abdulaziz bin Salman, tried to organize an emergency meeting last month to discuss cuts, but Russian officials resisted, saying that more time was needed to assess the impact of the epidemic. As a compromise, the group held a technical committee meeting that recommended cuts of 600,000 barrels a day.
In the market, though, worries grew that the alliance between OPEC and Russia that has helped prop up prices in recent years might be falling apart.
Some analysts are betting that the risks of a further price drop if the meeting fails to reach a deal will persuade Moscow to go along.
“Russia has certainly slow-walked” toward an agreement, Helima Croft, head of global commodity strategy at RBC Capital Markets, an investment bank, wrote in a note to clients, “but the economic and political benefits of cooperation remain compelling.”
OPEC gatherings have become more complex with the presence of Russia and other producers in recent years. Instead of a one-day meeting as in the past, this session is expected to consume three days with a ministerial committee meeting Wednesday followed by an OPEC meeting Thursday. Russia and other producers like Oman and Kazakhstan are then expected to join officials from the 14 OPEC countries on Friday.
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With Oil Prices Down 20%, OPEC Pushes for Stability - The New York Times
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