Everybody Wants To Rule The World, Part 3 - Coronavirus, the Crude Price Slide and OPEC Production Cuts

Oil-production restraint by OPEC and 10 cooperating countries grows more challenging with time, and just when market projections began to hint at relief for the OPEC-Plus group, the spread of the new coronavirus in China and beyond became a sudden and possibly serious impediment to global economic growth and oil demand. Yesterday’s slide in crude oil prices amid newly heightened concern about the potential pandemic’s effects will only add to the challenges that OPEC-Plus countries will face in managing crude supply. So far, the OPEC-Plus group has achieved unprecedented compliance with its production ceilings, which it implemented in January 2017 and has adapted a few times since in response to market pressure. That effort has kept the crude price above the ruinous levels of 2015, memories of which have encouraged quota discipline. But the threat of a major, coronavirus-related slowdown in global oil demand could seriously undermine OPEC-Plus’s efforts, which already had been hurt by dissent within its ranks. Today, we continue our series with a look at Monday’s price drop, the latest supply and demand forecasts and a discussion of the obstacles that might affect OPEC-Plus going forward. 

Prices for West Texas Intermediate (WTI) and Brent dropped by 4% on Monday, February 24, on news that reported cases of coronavirus — a.k.a. COVID-19 — have surged in South Korea, Italy and Iran. While energy markets and entities such as the International Energy Agency (IEA), the U.S. Energy Information Administration (EIA) and OPEC already had built in their forecasts at least some slowdown in economic growth and oil demand, new fears that COVID-19 could have a much broader impact — as reflected in yesterday’s oil price decline — may well result in further reductions in forecasted demand for oil over the next few months. And that could quash OPEC-Plus’s hope that, after more than three years of ratcheted-up production restraint, pressure on the group for still more cuts in production might ease as soon as next year. Of course, how this all plays out will not only impact oil prices but U.S. shale producers’ drilling-and-completion plans for 2020 and 2021.

As we pointed out in Part 1 of this blog series, coordinating production limits is never easy, especially when relations between key participants are strained. Yet the effort by the OPEC-Plus group has survived not only geopolitical pressure but also heavy competition from growing supply not covered by the agreement, especially from the U.S. In Part 2 of this series, we suggested that OPEC-Plus’s perseverance might soon be rewarded by expected market changes that, if they come about, would at least temporarily relax pressure for further production cuts. Between now and then, however, the group must manage past the disagreement between OPEC and Russia over how to respond to the coronavirus’s ramifications for oil demand — a tiff that may only worsen now, with heightened concern about oil demand. The market clearly is worried. Yesterday, February 24, the Brent crude price was $56/bbl, compared with $65-68/bbl around this time last year and, while Brent had seen a short rebound last week, this week’s slide shows that there’s still a lot of uncertainty out there. Before addressing the OPEC-Plus group’s possible next move, we take a closer look at the impact of its production cuts to date and what additional reductions would mean.

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