Dubai, UAE (February 21) – OPEC is preparing to make deeper additional cuts that we believe is in the range of 500,000 to 600,000 barrels per day (b/d) in the second quarter, as recommended by its Joint Technical Committee (JTC) earlier this month.
The cuts are likely to be announced at the upcoming OPEC+ meeting in Vienna on March 5-6 in response to lower demand forecasts.
We believe Russia will support the move. Despite the mixed signals coming from various top officials in Russia, we think the deal was likely sealed in a call between King Salman and President Putin on February 3.
Russia’s slow walking of a response promised days ago and blocking of an earlier OPEC meeting is seen as necessary for domestic political consumption, most especially with Russian energy companies.
In our view, Russia’s strategy blocking an early February OPEC meeting and insisting on the March meeting dates was in the hope that the delay may result in clearer market data that would mitigate the need for deeper cuts.
Saudi Arabia and OPEC currently does not see any material change in the data that would negate the necessity for deeper cuts, despite recent trends showing a slower growth rate in confirmed and suspected cases of the coronavirus. While slower growth rates are good news, OPEC believes the damage has been done to demand data and must be addressed.
All of this is playing out as we forecasted in our early February client that predicted no early OPEC meeting but to expect “significant deeper cuts with potential 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.
If, as we expect, OPEC announces additional cuts of at least 500,000 b/d, the total cuts for the second quarter will be 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 yet clear on the additional Saudi cuts.
Meanwhile, Libya production is offline by about 1 million barrels a day and is becoming a much serious longer-term concern that will get a big focus at the OPEC meeting. Initially, it was thought Libya production declines would be temporary and come back online at the end of this month. However, it now seems more likely the Libyan situation will continue to worsen and production will be shut in for the next few months at least.
