A proposed deeper oil production cut by the Organization of Petroleum Exporting Countries (OPEC) would fail to prevent the glut of supply in the oil market caused by low global demand amid the coronavirus outbreak.
The coronavirus outbreak that emerged in China and spread to the world is expected to curb global oil demand growth at least for a quarter this year. However, according to Rystad Energy in a statement on Thursday, the deeper output cut proposed by the OPEC committee is "far from enough" to balance the market.
"The economic shut-down in China will cause the largest negative oil demand shock since 2008," Rystad Energy’s Senior Vice President and Head of Oil Markets Bjornar Tonhaugen said in the statement.
"Even though the chaos unfolding in Libya has wiped out most of its oil production, and even if OPEC’s output cuts are fully applied, they will not be enough to fill the demand gap now exacerbated by the coronavirus," he added.
The Joint Technical Committee (JTC) of OPEC and its allies announced its recommendation to the group dubbed OPEC+ on Feb. 8 to extend the current output cut of 1.7 million barrels per day (bpd) until the end of 2020, instead of the first quarter of the year.
The JTC also recommended the implementation of an additional deeper output cut of 600,000 bpd up to the end of the second quarter this year.
Due to low oil demand caused by coronavirus, Rystad Energy said both the first and second quarters of 2020 would see global oil production surpluses.
"Our estimate shows that the first quarter of the year will see producers left with a stock build of 700,000 bpd. Our previous estimate was for a more or less balanced first quarter with a 100,000 bpd surplus," the Norway-based independent energy research and consulting firm said.
Global oil stocks could rise by 1.3 million bpd in the second quarter if oil production is not reduced further. So, even if the additional 600,000 bpd of OPEC+ output cuts are implemented in the second quarter, there could still be a sizable surplus of 700,000 bpd in the market, it added.
By Ovunc Kutlu