OPEC+ ‘no deal’ a blow to the market

Speaking after today’s OPEC+ meeting broke up, Ann-Louise Hittle, vice president, Macro Oils, at Wood Mackenzie, said: “Today’s outcome is a psychological blow for the market, as the steep plunge in oil prices shows.

“And the market is now facing the spectre of unrestrained production once the current OPEC+ agreement expires in March.

“However, we do not think Saudi Arabia will push hard to lift their output in the northern hemisphere spring.

"Given weak demand and the likelihood this weakness will persist into the second quarter, it will be hard for any producer to increase their output sharply once the original production deal expires at the end of this month.”

Demand risks

She added: “One factor to bear in mind is that the plunge in demand we saw in Q1 was created by circumstances in China. The country’s coronavirus (Covid-19) containment measures have been far more stringent than those imposed anywhere else, and are not likely to be copied elsewhere.

“The lack of a production deal carries risk. This would become apparent if global economic growth weakens and oil demand continues to contract more sharply than expected thanks to the double whammy of coronavirus containment measures and falling GDP.”

Hittle said: “Our current projection sees global liquids demand fall by 2.7 million b/d year-on-year in the first quarter of 2020, the first year-on-year decline on a quarterly basis since Q2 2009.

“It is the most severe decline since Q4 2008, the height of the 2008-2009 global economic crisis, which saw demand tumble by 2.8 million b/d year-on-year.”

Hittle said: “If the impact the coronavirus has had on global oil demand is sustained, then by the second half of the year we’d expect to see weaker GDP. This will have a far greater impact on oil demand than just temporary reductions in jet fuel and gasoline demand.

“A longer, sustained outbreak of coronavirus threatens to hit oil demand with a double whammy: already weak demand will soften further because of containment measures, and this will weaken GDP.”

What next?

What does this mean for OPEC and OPEC+? It would mean that the group would likely need  to monitor economic indicators closely. It may even mean that they could be forced to call an emergency meeting during the second quarter.

She added: “A sustained bout of low oil prices will further reduce cash flow and investment into the US oil patch, causing further hits to Lower 48 production growth later this year. It takes at least six to nine months for reductions in spend to lead to lower oil production in the US Lower 48.

“In that time, their access to capital may be limited and their free cash flow badly hit.

“The only silver lining in a very dark cloud is for refining – the sector will be hit hard by weak demand, but it is at least saved from tightening crude differentials associated with a major cut in OPEC supplies.”