OPEC+ delegates weigh new oil cuts as they analyze coronavirus impact

OPEC and its allies ended the first half of a two-day technical committee meeting Tuesday with no pronouncements on new production cuts, but heard from a Chinese official who said markets were overreacting to the coronavirus outbreak.

OPEC and its partners, collectively known as OPEC+, are under pressure to stem a 20% plunge in oil prices since news of the virus first broke, with Saudi Arabia and other members pressing the bloc to institute immediate production cuts of some 500,000 to 1 million b/d, according to sources. That would be on top of the 1.7 million b/d in curbs that OPEC+ began instituting in January.

ICE Brent futures slid to a one-year low of $53.95/b on Tuesday, but were trading higher $54.55/b at 1826 GMT.

The committee, composed of delegates from nine OPEC+ countries, were meeting in Vienna this week to analyze market scenarios and see if a consensus on production policy could be reached. The entire coalition is scheduled to meet March 5-6 in Vienna, but the meeting could be moved forward if a plan is agreed.

OPEC sources said there was no decision on a meeting date. Not all members were fully convinced of the need.

China's ambassador to international organizations in Vienna, Wang Qun, said that travel bans, closed borders and trade restrictions imposed in the wake of the coronavirus outbreak were politically motivated and were contributing to the destabilization of the global economy.

While the Chinese economy will be affected in the short term by the spread of the virus, it will rebound quickly, he told reporters outside the OPEC secretariat.

"We do not want to see certain overreactions based on political considerations," Wang said. "All these overreactions will lead to unnecessary disturbances on the market, on the oil market, on the economic market."

The ambassador had been invited by the committee to update delegates on China's containment measures.

Crude produced by the OPEC+ coalition -- which includes OPEC, Russia and nine other allies -- is very exposed to the outbreak, with China buying more than 70% of its supplies from the group.

Libya watch

Russia has said it is ready to cooperate and is monitoring the situation with its OPEC+ colleagues.

"The JTC is meeting and studying the OPEC report on the current situation and forecasts," Russia's energy minister Alexander Novak said Tuesday morning, as quoted by Prime news agency. "Within two days this work will be carried out, and we will have the opportunity to discuss it further. If there is such a need, we are ready to collectively hold a meeting at the ministerial level."

Novak cautioned there is still a lot of uncertainty on the impact of the outbreak on oil demand.

"I am not ready to speak about concrete proposals right now, because, let me repeat, now it's important to assess the situation and forecasts. There's a lot of uncertainty, perhaps these are panic fears," he said.

Iranian oil minister Bijan Zanganeh said Sunday that the meeting should not be moved forward unless a decision on further cuts was reached in principle.

To make things even trickier for the alliance, one of its members, Libya, has lost more than 1 million b/d of crude in the past three weeks due to civil conflict.

If this oil came back online soon, it could nullify the deeper cuts being considered.

Analysts at Standard Chartered said the calibration of OPEC response to the coronavirus is largely dependent on Libya's crude oil output.

"Should Libyan output remain offline, a first half 2019 build is balanced by an H2 draw even under our most severe demand scenario. However, while the Libyan outage might delay or reduce the reaction, pressure on prices is likely to force an additional OPEC cut despite potential H2 tightness," the bank said in a recent note.

Analysts say the onus will again be on Saudi Arabia to convince other members that prompt action needs to be taken.

"Saudi Arabia will panic over a return of the contango in Brent and it will likely act promptly to try to prevent the contango from widening over storage costs," said Olivier Jakob at consultancy Petromatrix.

Giovanni Staunovo at UBS expects the coalition to make deeper cuts as oil demand growth is likely to take a hit from the impact on transportation from the coronavirus epidemic.

"We believe the OPEC+ will announce an additional production cut of at least 500,000 b/d for the second quarter eventually extending the cuts until the end of the year, with a review at the next ordinary meeting in June," he said in a recent note.