Opec is on the verge of making its deepest oil production cuts since the global financial crisis amid warnings that the coronavirus may wipe out the world’s oil demand growth this year.
The world’s largest oil-producing nations plan to avert an oil market crash by cutting millions of barrels from their daily production, but traders fear the economic impact of Covid-19 could still drive global market prices to multi-year lows.
The Organisation of Petroleum Exporting Countries cartel, which is holding crunch talks in Vienna this week, put forward proposals for the deepest oil production cuts since the global financial crisis after warning that the virus could halve the world’s forecasts for oil demand growth over the first half of this year.
The 14-strong group, led by Saudi Arabia, plans to deepen its existing production cuts by a further 1.5m barrels a day from next month, effectively holding back 3.6% of global oil supplies from the market to keep prices from collapsing.
The benchmark oil price reached almost $69 a barrel in January, before the coronavirus outbreak, before plummeting to one-year lows around $50 a barrel last week.
Opec will put the plans to its allies in the Opec+ group, led by Russia, in a separate meeting on Friday in the hope they will agree to make up one-third of the planned cuts which are due to begin next month.
Major commodity traders have warned that Opec’s measures might not go far enough, even with the support of Russia, because the impact of the coronavirus could cause oil demand to flatline in 2020 for the first time since 2008.
US investment giant Goldman Sachs said Opec’s plans are too little too late to save oil prices from falling back to lows not seen in over three years. The bank expects oil prices to fall to $45 a barrel next month, the lowest price since late 2016.
Jeff Currie, head of global commodities research at Goldman Sachs, told Bloomberg the virus has already cut China’s oil demand by millions of barrels a day over the last four weeks, and that the slowdown in extending through the rest of the global economy.
“I think the damage is done,” he said. “The demand damage is happening today, right now. Cutting production by 1.5m barrels a day in April or May is not really going to save you in the current environment. That’s why I say it’s too little too late.”
Opec claims that the economic impact of the coronavirus may drive global oil demand down to 0.48m extra barrels of oil a day this year, from forecasts of 1.1m barrels of growth in December, before the coronavirus outbreak.
Commodity trading houses including Vitol, Trafigura and Gunvor believe the oil demand growth may fall to zero, or even contract, due to the economic contagion of the virus.
Rystad Energy said Opec and its allies would need to cut at least 2m barrels of oil a day from their combined fossil fuel production to balance the economic blow of the virus, which could cause oil prices fall below $45 a barrel in the second quarter of this year.
“We have modelled out three likely outcomes of the Opec+ meeting, and not a single one of them comes close to bridging the supply-demand balance,” said Bjørnar Tonhaugen, Rystad’s head of oil markets. “It’s not enough to counter the demand destruction of Covid-19.”
China’s demand for oil and other raw materials collapsed in January after the outbreak forced some of its largest refineries and factories to close. The economic slowdown is expected to spread globally as companies and schools shut down, and travel restrictions limit international travel.