Crude Oil Rebounds; OPEC Production Cuts Eyed

Oil prices posted gains Tuesday, rebounding from one-year lows amid signs major oil producers will get together to cut production, and balance the anticipated fall in demand from China on the back of the outbreak of the coronavirus.

By 8:20 AM ET (1320 GMT), U.S Crude futures were up 0.4% at $51.31 a barrel, after sinking below $50 a barrel for the first time in more than a year on Monday. U.K. Brent the global crude benchmark, was up 0.6% at $55.40 a barrel, after dropping below $55 a barrel on Monday to its lowest close since December 2018.

Technical experts from the Organization of Petroleum Exporting Countries and its allies, a group known as OPEC+, are meeting at the cartel’s Vienna headquarters on Tuesday to evaluate the disease’s impact. The outcome of the discussions may determine whether the group convenes an emergency meeting to consider new output cuts later this month.

Oil giant BP  announced its latest quarterly results Tuesday, and Chief Financial Officer Brian Gilvary said “we see demand down on average for the year by 300,000 to 500,000 barrels a day,” in an interview in London, citing the impact from the coronavirus outbreak.

This would wipe out a third of global oil-demand growth this year, hence the pressure on OPEC to act.

“We believe the OPEC+ will announce an additional production cut of at least 500,000 barrels per day,” UBS Group AG analyst Giovanni Staunovo wrote in a report. “With Brent now trading below $60 a barrel, we expect the group to speak with a single voice again.”

Still, the number of coronavirus deaths in China continues to climb, reaching 425 as of the end of Monday, from over 20,000 cases. And there are few signs that the economic shutdown will end anytime soon – in fact only today Macau, the world’s biggest gambling hub, asked casinos to close temporarily to curb the coronavirus spread.

“While it looks increasingly likely that OPEC+ will be forced to act, the big question is whether they would be able and willing to cut significantly more,” analysts Warren Patterson and Wenyu Yao at ING said, in a research note.

An extra 500 million-barrel-a-day cut may be possible, they added, “but anything beyond that would be hard to achieve as it becomes questionable who would be able to make significant cuts beyond Saudi Arabia and Russia.”

“The Saudis are already over-complying with the current deal, and so there is likely a limit on how much more they would be willing to cut. Therefore, if demand losses at the current scale persist into the second quarter, we will likely see even weaker prices,” the analysts said.

Eyes turn to the release of the American Petroleum Institute’s weekly data on U.S. inventories, at 4:30 PM ET (2130 GMT), for a gauge on the current U.S. supply levels./

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