OPEC+ consulted with China in an urgent assessment of how the coronavirus may hurt oil demand, and what measures the group could take to stop prices falling any lower.
The unusual appearance at the cartel’s headquarters of Wang Qun, China’s ambassador to international organizations in Vienna, underscores how the outbreak has upended the global market. Crude sank below $50 a barrel in New York for the first time in more than a year on Monday on signs that fuel consumption in the world’s biggest oil importer may have plunged by as much 3 million barrels a day, or about 20%.
“For oil markets, this is the worst crisis, at the worst place, and the worst time,” said Roger Diwan, vice president of financial services at IHS Markit Ltd. “OPEC has no option but to cut production as China is going to buy a lot less crude.”
It’s no easy task for the Organization of Petroleum Exporting Countries and its allies to evaluate the impact of the disease, which continues to infect thousands of people each day and cause massive economic disruption. Estimates of how much demand will be wiped out in the coming months vary widely, making it difficult to gauge the size of a production cut that would trigger a price recovery.
Officials didn’t discuss deeper output cuts on Tuesday, but will revisit the matter when talks continue on Wednesday morning, said one delegate.
OPEC’s own internal analysis, presented in the Austrian capital on Tuesday, showed a modest drop in global demand growth of about 400,000 barrels a day for about six months even for a worst-case epidemic, according to delegates.
Earlier in the day, BP Plc predicted the outbreak would have a bigger effect, erasing 300,000 to 500,000 barrels a day of consumption for 2020 as a whole. S&P Global Platts said its worst-case scenario was for a hit of about 1 million barrels a day, which would take annual demand growth down to 320,000 barrels a day, the weakest since the 2008 to 2009 financial crisis.
After meeting with experts on the OPEC+ Joint Technical Committee, Wang told reporters that the virus would inevitably affect oil demand, but cautioned against overreacting. Behind closed doors, he told cartel officials that the impact would be limited and localized, said delegates, who asked not to be named because the talks were private.
“Any exaggeration and any overreaction is not in the best interest of the general public let alone the market,” Wang told reporters.
The committee’s assessment may help determine whether the 23-nation alliance — which pumps about half the world’s oil — convenes an emergency ministerial meeting later this month to consider new production cuts. Saudi Arabia, OPEC’s biggest member, has been pushing for such a gathering, but has faced some reluctance from Russia.
OPEC+ only just started a fresh round of deeper cutbacks last month, the latest step in a three-year effort to prevent plentiful U.S. shale supplies putting the global market into surplus. But the outlook has deteriorated rapidly in the last few weeks.
OPEC’s research department in Vienna presented two models with different estimates of how the virus may affect oil consumption, according to a delegate. The worst-case scenario envisaged a fast-spreading epidemic that lasts six months and wipes out about 400,000 barrels a day of demand, before a market rebound to pre-virus growth levels in the second half of the year.
If OPEC+ were to maintain its current output reductions throughout that period, there would be a surplus of 600,000 barrels a day in the first quarter and 1 million in the second, the analysis showed. The committee hadn’t yet discussed whether the group should deepen its cutbacks, delegates said.
While West Texas Intermediate, the U.S. benchmark, stabilized on Tuesday after slipping below $50 on Monday for the first time in more than a year. Prices are still far below the levels that most OPEC members need to cover government spending.
While Riyadh has urged fellow producers to meet and act, there’s so far been a more cautious attitude from its most important partner, Russia. Though not an OPEC member itself, Moscow has proved to be an influential voice since the OPEC+ alliance was established three years ago.
Russian President Vladimir Putin and Saudi King Salman bin Abdulaziz discussed the global energy markets by phone Monday evening, the Kremlin said in a statement, adding that both leaders confirmed “readiness to continue cooperation within OPEC+.”
Moscow doesn’t face the same budgetary need for elevated oil prices as most OPEC members. Energy Minister Alexander Novak said on Tuesday his country is prepared to meet this month, and intervene if necessary, but the impact of the virus should be assessed first.
Iraq, which is OPEC’s second-largest producer but has a poor record of implementing output cuts over the past three years, said it supported a response to the coronavirus.
“There’s definitely a justified worry over what’s happening, given the importance of China as a consumer,” a spokesman from the country’s oil ministry said in a statement. ”We believe that the wisdom of the members of OPEC are capable of containing this crisis in the coming period.”