The spread of the coronavirus epidemic from China around the world poses a unique challenge for the Organization of the Petroleum Exporting Countries and their allies, as the major oil producers prepare for talks next week aimed at supporting prices and balancing global supply and demand.
OPEC and its allies, collectively known as OPEC+, will gather in Vienna for official meetings on March 5 and 6. The oil market expects the producers to extend the expiration of existing production cuts, and many analysts see the likelihood of an additional output reduction.
“The main obstacle to a new agreement on production cuts is that there’s still a high degree of uncertainty surrounding the impact of the coronavirus,” which causes COVID-19, says Cailin Birch, global economist at The Economist Intelligence Unit.
“It is still difficult to ascertain what the final impact on oil consumption will be in 2020, and some partners to the agreement, most notably Russia, may want to avoid a scenario where OPEC continues to cut indefinitely,” Birch says.
An OPEC technical committee on Feb. 8 recommended that OPEC+ extend current production cuts to the end of 2020. The current pact calls for OPEC+ cuts of 1.7 million barrels a day, from an October 2018 baseline, through March.
The committee also recommended a “further adjustment in production until the end of the second quarter.” Its press release didn’t specify the size of a potential added reduction, but it has been widely reported that Russia rejected a push by Saudi Arabia to agree to an additional 600,000-barrel-per-day cut for OPEC+.
News of Russia’s reluctance has put a strain on its more than three-year-old alliance with Saudi Arabia. Paul Sheldon, chief geopolitical advisor, analytics at S&P Global Platts, refers to the cooperation between the oil producers as the “most important dynamic within OPEC+ policymaking since 2016.”
“Russian participation became an OPEC game-changer in late 2016, pushing production cut deals over the finish line” in 2016, 2018, and 2019,” he says.
Sheldon points out that Russia’s oil-price requirements for its federal budget remain well below those of Saudi Arabia, but “its desire to cooperate has increased notably” whenever Brent falls below $60 a barrel.
The most likely outcome for the meeting would be a three-month oil quota reduction of 500,000 barrels per day, says Jay Park, chief executive of oil and gas company ReconAfrica US:LGDOF. OPEC will want to show action that “has limited duration,” given the epidemic is most likely to be limited to the first half of the year, he says, adding that such a move would be bullish for prices.
However, “factors other than OPEC are having a bigger impact on oil prices,” Park says. So a bullish OPEC decision may have “far less influence” on oil prices than bearish evidence of the virus spreading aggressively in Europe, Asia, or North America.
Park believes the disease will almost certainly pose a temporary impact and stability will return once the epidemic passes. He does not expect oil prices to see any historic highs or lows as a result of coronavirus.
For now, with the oil market currently in a seasonally weak period for demand, Jay Hatfield, portfolio manager of the InfraCap MLP exchange-traded fund AMZA, -2.94%, urged caution on oil and energy stocks through the March to April time frame, “as the overhang from COVID-19 slowly lifts and we head into the seasonally strong driving season.”