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Will OPEC plus opt for deeper oil cut?

Members of Organization of Petroleum Exporting Countries (OPEC) are scheduled to meet in Vienna in first week of March 2020. Top of the agenda item is to decide production quotas in the aftermath of coronavirus spread. To arrive at further production cut will not be easy because of United States emerging as one of the largest oil producing country as well as exporting substantial quantity. Even the bigger concern is that crude oil price has plunged below US$50/barrel.

On Friday, 28th February 2020, oil prices fell for a sixth day in a row on to their lowest in more than a year, causing futures to drop by the most in a week since 2016. The most active Brent May contract plunged to US$49.67 a barrel, its lowest since July 2017. Following the suite, the US benchmark, West Texas Intermediate (WTI) declined to US$44.76, the lowest closes for both Brent and WTI since December 2018. Brent lost almost 14%, its biggest weekly percentage decline since January 2016, while WTI fell over 16% in its biggest weekly percentage drop since December 2008.

Several key OPEC members are leaning towards a bigger than previously expected oil output cut. Saudi Arabia, the biggest producer in OPEC, and some other members are considering agreeing an output cut of one million barrels per day (bpd) for the second quarter of 2020, more than an initially proposed cut of 600,000 bpd.

The OPEC plus panel that recommended the 600,000 bpd cut, called the Joint Technical Committee, is scheduled to convene again on March 3, to revise the recommendation in the light of more recent oil market data. While Saudi Arabia supports a further output cut, Russia has yet to announce its final position. Moscow has a history of only agreeing to OPEC+ actions at the last minute, after initial reluctance. Russian Energy Minister Alexander Novak said that Russia was very satisfied with its cooperation with Saudi Arabia and wanted to continue this within OPEC and non-OPEC frameworks, as well as bilaterally.

Reportedly, Saudi Arabia has expressed willingness to make the deepest cuts to its monthly official selling prices (OSP) to Asia since 2012, tracking declines in Middle East benchmarks and weak refining margins as the coronavirus outbreak has cut demand.

Large Saudi crude price cuts for a second straight month indicate that Asia, the world’s fastest growing demand center for oil, is swamped with supplies after the spreading virus led to run cuts at Chinese refineries. This would be the biggest price cut for the Saudi flagship grade since early 2012.

In February, the Dubai benchmark market structure moved into a contango, where prompt prices are lower than those in future months which indicates lower demand, from a backwardation in January, when prompt prices are higher than later prices, indicating higher demand. Asian refiners will also begin shutdowns in April for spring maintenance further dampening crude demand.

Stockpiles in Asia are high for both crude and refined products. It would take a few months to consume these. Prices for lighter Saudi grades could fall more than medium and heavy grades as high-sulphur fuel oil (HSFO) margins have rebounded.

Saudi crude OSPs are usually released around the fifth of each month, and set the trend for Iranian, Kuwaiti and Iraqi prices, affecting more than 12 million barrels per day (bpd) of crude bound for Asia.

State oil giant Saudi Aramco sets its crude prices based on recommendations from customers and after calculating the change in the value of its oil over the past month based on yields and product prices.

Rising US output

Reportedly, US energy firms added oil rigs for a second week in a row. Companies added two oil rigs in the week ended 14th February 2020. This took the total rig count to 678. There were 857 active rigs during the same week a year ago. Total number of rigs, mostly producing both oil and gas averaged 791.

The oil rig count, an early indicator of future output, dropped by an average of 208 rigs in 2019 after rising 138 rigs in 2018 as independent exploration and production (E&P) companies cut spending on new drilling in response to investor demands to improve financial returns in a low energy price environment.

According to a Reuters report, analysts at Simmons Energy, energy specialists at US investment bank Piper Sandler has forecast the annual average combined oil and gas rig count would decline slide from 943 in 2019 to 816 in 2020 before rising to 848 in 2021.

Lately, Energy Information Administration (EIA) has cut its growth outlook, forecasting US crude production to rise by 960,000 barrels per day (bpd) in 2020 to a record of 13.2 million bpd, below its previous forecast for a rise of 1.06 million bpd.

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