The Organization of Petroleum Exporting Countries (OPEC) and its allies are estimated to make an additional oil production cut of 1 million barrels per day (bpd) this week, an expert told Anadolu Agency on Thursday.
The coronavirus outbreak, which originated in China and quickly spread around the world, caused prices to plummet last week when Brent crude posted a 12.6% weekly decline -- the largest weekly fall since January 2016.
The international benchmark decreased by more than 30% since the start of 2020, and fell to $48.40 per barrel on Monday to mark its lowest level since July 24, 2017, according to official data.
OPEC and non-OPEC members met in Vienna on Wednesday. Up to Friday, they will discuss how they can support prices in the face of coronavirus-related weak global oil demand and the rising supply glut.
"We think that OPEC+ will agree to a 1 million bpd cut in its quota to 2.7 million bpd," said Samuel Burman, an assistant commodities economist at London-based Capital Economics.
"Part of this will come about from Saudi Arabia’s voluntary cuts being formalized, and we expect the other 600,000 bpd to be split between OPEC+ [members]," he added.
- Additional cuts to extend until end of June
The group, dubbed as OPEC+, has already been implementing a production curb of 1.7 million bpd since the beginning of 2020, while Saudi Arabia has been making a separate voluntary cut of 0.4 million bpd.
As the coronavirus outbreak causes weak global oil demand, it is anticipated that the supply glut will rise and continue to push crude prices lower unless OPEC makes additional output cuts.
The current production curb of 1.7 million bpd was scheduled to run until the end of the second quarter of 2020, but the question remains whether deeper cuts will be made and extended for a longer duration.
"We expect that additional output cuts will last until the end of June this year," Burman said, adding "beyond this period, there is the risk that OPEC production cuts will just encourage non-OPEC production, which would be self-defeating."
- Prices likely to remain low if coronavirus continues to spread
There is also the question of how much Russia will curb its output to participate in the new production cut.
Russia, non-OPEC's largest producer, agreed in December 2019 to lower its output by an additional 70,000 bpd out of the OPEC+'s total of 500,000 bpd, which raised Moscow's output cut from 228,000 to 300,000 bpd.
"We expect that Russia will agree to a small cut production to avoid damaging its diplomatic relationship with Saudi Arabia," Burman said, cautioning that Capital Economics is skeptical that Russia will fully comply with the agreement. He warned, however, that if coronavirus continues to spread, oil prices are likely to remain relatively low.
In this case, he said that "there is not much that OPEC+ can do to support prices, as any additional production cuts would simply support high-cost producers elsewhere.
- Prices to rise later as demand picks up
Capital Economics declared in its report on Wednesday that as coronavirus has spread rapidly outside China, economic disruption worldwide has mounted. The economic research consultancy firm has therefore slashed its forecast for global economic growth in the first and second quarters of 2020.
The company also said it estimates a 15% decline in China's oil demand in the first three months of this year, compared to last year, adding "... we estimate that there will be a large market surplus in the first quarter."
"When we factor in a further 1 million bpd cut in output into our model of the fundamental price, it merely prevents a further fall in prices rather than a sustained boost," the report said.
On a more positive sentiment, the report said that Capital Economics expects prices to rise later in the year as demand picks up.
By Ovunc Kutlu