Page 6 - DMEA Week 20 2020

DMEA COMMENTARY DMEA
OPEC chief optimistic that the worst of the oil crisis is over
OPEC is cautiously optimistic that the worst of the oil crisis triggered by the coronavirus pandemic is over, said the group’s top official
MIDDLE EAST
WHAT:
Member countries of OPEC + have responded to the oil price fall with alacrity.
WHY:
Prices have fallen so low as to threaten the entire oil market.
WHAT NEXT:
OPEC+ will look at future options when it meets
in June.
THE outlook for the market in the second half of the year is starting to look more encouraging as the global economy recovers, said Mohammad Barkindo, secretary-general of the Organisation of Petroleum Exporting Countries (OPEC). The cartel and its allies are rapidly implementing their production cuts, he said.
“Here at OPEC we remain cautiously opti- mistic that the worst is behind us,” Barkindo said in a Bloomberg television interview from Vienna on Friday. “What we saw in April was extraordinary,” but the group’s members “rose to the challenge.”
OPEC’s speedy response
The cause of this optimism is that in the face of an unprecedented oil market collapse, OPEC+ has responded with an urgency never seen before. With unusual speed, the alliance is launching an unparalleled programme of production cut- backs this month to offset the slump induced by coronavirus (COVID-19).
The 23-nation coalition is well on its way to cutting 9.7mn barrels of daily crude out- put - roughly 10% of global supplies - in the first two weeks of the agreement, according to tanker-tracking data, interviews with physical crude traders and refiners, and assessments by consultants.
“The actual production cuts are deeper and more spectacular than any reasonable person would have thought a week ago,” said Ed Morse, head of commodities research at Citigroup.
Despite scepticism over the efficacy of the measures unveiled in mid-April by Saudi Ara- bia, Russia and their partners, compared to the immense hit to demand, the impact has been substantial. Oil prices have recovered by 60% in the past three weeks, as a pick-up in fuel use is complementing the supply cuts.
Little option
Much of the prodigious effort undertaken by OPEC and its allies has been unavoidable.
With a dearth of buyers and storage, they have had little choice but to slash production. Saudi Arabia has been forced to reverse the massive output increases made in April, when Riyadh was waging a vicious battle for market share with fellow OPEC members. The kingdom
has come under immense political pressure from allies in Washington to shield the US oil industry. Yet at the heart of the swift response is a rec- ognition of the scale of the oversupply, and the threat posed to economies dependent on crum-
bling oil revenues.
“Partly it’s because they couldn’t sell the oil
anyway,” said Morse. “But this is a moment when they really do recognise their mutual interdependence and commonly shared vulnerability.”
OPEC+ will look at all options when it meets again in June, Barkindo said. The 9.7mn barrels per day (bpd) of production cuts that started on May 1 are due to taper gradually after two months. It is premature to say whether the group could decide to change this plan, he added, say- ing that the cartel will consider the state of the global economy, the strength of the recovery in oil demand and the status of the coronavirus pandemic in its discussions. “The outlook for the second half of the year is beginning to look encouraging and positive that there will be a rebound,” he said.
The group members have been rapidly imple- menting their cuts, the secretary-general said. Combined with additional voluntary curbs for June announced by Saudi Arabia, the United Arab Emirates and Kuwait, plus reductions in other countries including the US, total global supply will drop by as much as 17.2mn bpd.
“All participating countries are rapidly ramping up their level of compliance,” OPEC’s
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w w w . N E W S B A S E . c o m Week 20 21•May•2020