Page 8 - NorthAmOil Week 05

NorthAmOil COMMENTARY NorthAmOil
a collective reduction of 500,000 bpd that would stand until the crisis was over, cartel o cials said. Another option being considered would involve a temporary cut of 1mn bpd by the Saudis to jolt oil markets, the o cials said.
OPEC and its allies are split over how to man- age oil supply in the face of the deadly coronavi- rus, which has already eroded demand in China. Collective responses by oil producers tend to be more e cient in supporting crude prices, which have lost 15% in the past month.
Despite the Saudi prodding, the cartel and 10 allied nations led by Russia stopped short of scheduling an emergency meeting of its full dele- gation this week and agreed to hold the aforesaid technical meeting to access the virus’s impact and make recommendations to members.
Producers would then decide either to approve a small gathering led by Saudi Arabia and Russia — called a Joint Ministerial Monitor- ing Committee — or to hold a summit of all 23 producers in Vienna, the o cials said.
In considering what to do, the world’s big- gest producers face two key questions: how long will the crisis last and how severe will the con- sequences will be? e solutions are, of course, still elusive, but the OPEC+ group of nations will need to come up with some answers soon.
China is by far the biggest market for OPEC+ crude exports, with the big Persian Gulf produc- ers particularly vulnerable. Almost a quarter of all shipments out of the region last year went to China. Add in the other three big Asian buy- ers — India, Japan and South Korea — and that share rises to two-thirds. Four Asian countries took two-thirds of the crude passing through the Strait of Hormuz in 2019; China alone took almost a quarter.
It is difficult to overestimate the impor- tance of China to global oil balances. Earlier this month, OPEC’s own forecasts showed the world’s most populous country accounting for more than a quarter of all the growth in oil demand worldwide this year. e International Energy Agency (IEA) saw it playing an even
bigger role, with almost 40% of incremental demand in China. Transport fuels, especially gasoline, jet fuel and gas/diesel oil, likely to be hardest hit by the virus, account for nearly 60% of forecast Chinese demand growth this year. e word “virus” was not mentioned in either of those agencies’ monthly reports.
Almost all of China’s biggest crude suppliers are OPEC+ members, and even before the new coronavirus began to hit oil consumption, the swing producers that make up OPEC+ were in trouble. e hard-won output deal they reached in December failed to deliver any signi cant cuts to total output levels, and prices have dri ed lower. e deal is currently scheduled to expire at the end of March. Simply extending the cuts will do nothing to improve the worsening bal- ances between supply and demand, and there- fore it will take more to raise oil prices. Deeper cuts will be much harder to agree – Russia, for one, is against them – but that is what is needed to li prices in the face of a Chinese slowdown.
ere are already signs that a slowdown is happening. Sales of Latin American oil cargoes to China ground to a halt last week. Persian Gulf producers are starting to receive preliminary nominations from their customers of how much oil they want in March, and that will indicate whether Chinese refiners seek to reduce the volumes they li from export terminals in the region.
Non-OPEC producing countries – led by the US, Norway, Brazil and new producer Guyana – were already expected to add two extra barrels for every additional one consumed worldwide this year, squeezing OPEC. e loss of much of China’s oil demand growth will affect the producer group under the weight of falling oil prices, unless, collectively, they cut their output further.
Noting the unpredictability relating to the spread of the virus and recent uctuations in the oil price, the short term would appear to suggest considerable uncertainty and movement in both policy and price.™
Non-OPEC producing countries – including the US – were already expected to add
two extra barrels for every additional one consumed worldwide this year.
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w w w. N E W S B A S E . c o m Week 05 05•February•2020