Analysis: OPEC prepares to dial back the clock to 2003 with deeper oil cuts

As ministers began arriving Tuesday in Vienna for what one predicted would be "marathon" talks over a response to the COVID-19 epidemic, OPEC appears ready to slash its crude production to levels not seen in almost 17 years.

Some analysts say it may not be enough to prevent a further slide in oil prices.

OPEC, Russia and nine other allies, in a coalition known as OPEC+, are nearing the expiry of their 1.7 million b/d production cut accord at month's end.

Saudi Arabia has been urging the alliance to extend the deal and tighten quotas by another 1 million b/d or more, with analysts saying a potential scenario would be for the group to embrace a recommendation for 600,000 b/d in new cuts, while Saudi Arabia pledges to overcomply by another 400,000 b/d.

With Libya still seeing nearly all of its production offline due to civil strife, and Iran and Venezuela continuing to battle against US sanctions on its crude exports, OPEC output under such a deal could fall to around 27.4 million b/d or even lower, based on S&P Global Platts calculations.

That would be the lowest since late 2003, according to Platts OPEC survey archives, when Iraq was recovering from a US-led invasion that toppled President Saddam Hussein. It was also before Angola, the Republic of Congo and Equatorial Guinea were even members and while Gabon was on hiatus from the organization.

It would also be more than 6 million b/d — nearly 18% — below its all-time high of 33.86 million b/d set in November 2016, when members surged production in advance of the first round of OPEC+ cuts going into force in January 2017.

And it would be yet another erosion of OPEC's market share, demonstrating Saudi Arabia's insistent need for a deal to prop up prices, given its ambitious economic reforms and anemic GDP growth of the last few years.

January economic indicators in the kingdom, OPEC's largest producer, appeared relatively healthy, analysts with Riyadh-based Al-Rajhi Capital said in a recent note, but a prolonged oil price slump could be a slippery slope.

"Declining oil prices could be a cause of concern if the ongoing virus continues to remain a pandemic," the bank said. "China being one of the largest importers of Saudi Arabia, oil and non-oil demand may take a hit, which may affect overall growth."

DEPRESSED DEMAND

OPEC is scheduled to hold its ministerial meeting Thursday, and the non-OPEC partners will join talks Friday.

An advisory Joint Technical Committee met Tuesday to review the latest market scenarios, with one delegate lamenting a "very low" demand outlook for this year and saying the panel had asked the OPEC secretariat for more data.

Estimates of the market hit from COVID-19 seem to worsen by the day as the virus continues to spread.

S&P Global Platts Analytics downgraded its 2020 demand growth forecast by almost 500,000 b/d in mid-February to 860,000 b/d. Consultancy Facts Global Energy, however, says global oil demand will actually shrink by 220,000 b/d in 2020, with more downside risk.

"We are going to have tough meetings in Vienna," another delegate told Platts.

Kuwaiti oil minister Khaled al-Fadhel said he was preparing for a "marathon" week of discussions, according to state news service KUNA. He declined to elaborate further on arrival in Vienna.

Mohammad Darwazah, an analyst with Medley Global Advisors, said "the market will be looking for more" than just Saudi overcompliance and that cuts deeper than 1 million b/d may be needed to bring Brent back to $60/b, some $8/b higher than where the benchmark was trading Tuesday.

Crude producers have seen their budgets hit by the 25% slump in oil prices since the coronavirus outbreak began in January.

BARRING JOURNALISTS

In the OPEC secretariat, weeks of waffling over whether to hold the meeting, in light of the cancelations of several global oil conferences and 11 cases of COVID-19 reported in Vienna, ended with a declaration Monday that the summit would go on as scheduled.

But then officials surprised the OPEC press corps Tuesday afternoon, after most journalists had already arrived in Vienna, announcing that no reporters would be allowed into the building all week. It cited the advice of the UN secretary general, who recommended that meetings be shortened and participants be limited.

Hundreds of reporters and analysts typically gather in the secretariat's stairwell and press room during meetings, which can go on for hours, and OPEC has yet to reveal how it intends to publicize a decision. Pre-meeting press scrums with the ministers have been canceled, as has the traditional post-meeting press conference.

As a result, the coronavirus outbreak has already overshadowed the OPEC proceedings in more ways than one. The market will be watching if OPEC's approach to production policy is less harried than its last-minute planning for journalists.

New cuts could bring OPEC output to lowest since 2003

* S&P Global Platts estimate

** Prorated based on OPEC's share of previous production cut deals

*** In January 2020, compliance not including Saudi Arabia was 90%, according to Platts OPEC survey calculations