OPEC’s Joint Technical Committee (JTC) concluded three days of hastily scheduled meetings in Vienna today to evaluate the impacts of the coronavirus on oil markets.
While the JTC announced its recommendation for another 600,000 barrels per day (b/d) in cuts in the second quarter, Russia made it clear that it was still not committed to deeper cuts or the proposal to move the March 5-6 meeting up to mid-February.
Saudi Arabia was pushing for a larger number of additional cuts and the recommendation of 600,000 b/d seems to be a compromise to get the JTC announcement. Despite the JTC recommendation, no cuts are implemented unless approved by the full OPEC+ group at the next OPEC meeting in Vienna.
Russia Energy Minister Alexander Novak said his country was still evaluating the coronavirus impact on oil markets and had no timetable for when their assessment would be completed.
In our view, Russia will come around to supporting deeper cuts but we suspect there will be concessions to get them on board. As a result, the 600,000 b/d cut may be modified lower but we do not expect a number less than 500,000 b/d.
In addition, we think the momentum has slowed for an earlier February OPEC meeting to enact the deeper cuts. As we told clients in note this week, if an early meeting date was announced, it would be a signal that there was already an agreement on deeper cuts. But we now think the original March 5-6 dates will likely hold for the meeting as another concession to Russia. As a result, it will create some uncertainty and volatility about what the OPEC+ group will decide at the March meeting.
But make no mistake, we are forecasting significant deeper cuts with additional shock-and-awe voluntary cuts from Saudi Arabia that will at a minimum put a floor on prices but likely stabilize prices higher in the second quarter.
In December the OPEC+ group agreed to 500,000 b/d in deeper cuts from 1.2 million b/d to 1.7 million b/d. Moreover Saudi Arabia announced a surprise voluntary cut of an additional 400,000 b/d so the total OPEC+ deeper cuts for the first quarter are 2.1 million b/d.
We expect the next OPEC+ meeting to announce additional cuts of at least 500,000 b/d that will put the total cuts for the second quarter at 2.6 million b/d. We also believe there is the potential for an additional voluntary cut from Saudi Arabia in the neighborhood of 500,000 b/d – enough to get the total deeper cuts to 1 million b/d. At this time, it’s not clear if the additional Saudi cuts will be for the full second quarter or on a more temporary basis likely month-to-month as conditions warrant.
Lastly, it is important note that Libya production is offline by about 1 million barrels a day. It’s unclear how long this physical disruption will continue but we think February production totals will be down significantly as a result.
