OPEC agrees 1.5m b/d output cut as coronavirus eats into global demand

Speaking after OPEC announced its recommendation of a 1.5 million barrel per day (b/d) output cut, Ann-Louise Hittle, vice president, Macro Oils, said: “OPEC’s recommendation sends a strong message. It is a good decision, but its success hinges on compliance.

“It shows the producers’ group  is serious about getting on top of the oversupply in the market. Compliance itself probably won't be full, but moderate adherence should be enough to stabilise the market through the second quarter.”

Global oil demand tumbles

She added: “However, if the demand loss we are experiencing continues into the second quarter, the group may need to revisit the cuts and reassess them.

“In our current projection, world oil demand is expected to fall 2.7 million b/d in the first quarter. This is a massive drop, and it shows the scale of the problem OPEC+ faces.

“China’s demand alone is expected to fall by 2.3 million b/d in the first quarter.

“The drop in global demand is the most severe the market has seen since the fourth quarter of 2008, at the height of the global economic crisis.”

She added: “Whether Russia will agree to the cuts is the million-dollar question. Russia hasn’t signed on yet and as the leader of the non-OPEC group, their agreement is key. Given their history of co-operation with OPEC, we expect to see some support.”

Earlier today, ahead of the meeting, Hittle said: “The impact on demand from the coronavirus (Covid-19) outbreak will be key to the group’s decision.”

Uncertain impact

However, the scale and scope of the outbreak – and the impact it will have on global oil demand – is still uncertain.

OPEC+ is considering implementing a further output cut ranging from 0.6 million to 1.0 million barrels per day (b/d) for the second quarter of 2020, before reverting to the previously agreed Q1 2020 production curb.  

Hittle said: “Our current projection sees global liquids demand fall by 2.7 million b/d year-on-year in the first quarter of 2020, the first year-on-year decline on a quarterly basis since Q2 2009.

Severe decline

“It is the most severe decline since Q4 2008, the height of the 2008-2009 global economic crisis, which saw demand tumble by 2.8 million b/d year-on-year.”

Wood Mackenzie is monitoring the situation closely and may revise its demand forecast further, should coronavirus containment measures be extended widely and more deeply.

Hittle said: “We now expect annual average global demand in 2020 to grow by just 0.4 million b/d. For the first quarter, the weakest demand is in China. Signposts show China’s demand in February 2020 was hit by unprecedented disruptions across road transport, industrial operations and air traffic. We estimate China’s first quarter oil demand will fall by a massive 2.3 million b/d.

“The global demand outlook is based on our assumption the coronavirus outbreak is largely contained within the next few months and global oil demand stabilises.  However, there is significant downside risk. Should the duration and scope of the outbreak grow, it will magnify the economic impact.”

She added: “Our monthly forecast sees the impact on demand focused mainly on jet fuel outside China. At this stage, we also see a recovery in Chinese demand during the second quarter as workers return to their jobs.

Oversupply looms

“On this basis, the collapse in demand growth during the first quarter points to an enormous oversupply. Our latest market view sees that oversupply continuing, although at a much-diminished rate, through the rest of 2020.

“This is achieved in part via a sharp recovery in demand, but also from our assumption that OPEC+ reduces output further beyond the current 2.1 million b/d cut.”

She said the steep fall in Libyan production is helping OPEC’s attempts to rebalance the market, adding: “We are assuming the current blockade lasts through April 2020, but it is an uncertainty that could either keep 1 million b/d out of the market for weeks longer than our assumption or see its return in the next few weeks, which would add to the oversupply.”

Wood Mackenzie’s base case view assumes that leading OPEC Middle East producers - Saudi Arabia, Kuwait and the UAE - make further moderate production cuts in the second quarter of the year, in reaction to weakening demand.

However, OPEC+’s dilemma is compounded by the continued growth of US tight oil supplies.  While the rate of growth is slowing from its 2018 peak, we still anticipate year-on-year supply growth of 600,000 b/d for US crude and condensate.