OPEC may need further production cuts to balance oil market
The production cuts continued by OPEC may not be enough to stabilise global markets and the oil cartel may have to look cutting crude output by another 0.85 million barrels to balance the market hit hard by the Coronavirus outbreak.
According to a report by ICICI Securities, in the worst case scenario of China demand falling further on virus spread, OPEC may need to further cut production by 0.85 mbpd in the months of February and March to prevent the price of global crude oil from falling.
China is the largest importer of oil and among its top consumers after the US. The spread of coronavirus there has also impacted oil consumption and resulted a further slide in already oversupplied oil market.
The report of the brokerage firm has said that if China’s demand falls by 2.6-2.0 mbpd (Platts’ worst case scenario) in February-March 2020, it would result in a scenario where existing production cuts by major oil producers may not be enough to sustain prices.
OPEC’s January 2020 output at 28.37 mbpd is 0.29 mbpd below agreed quota, mainly due to fall in Libya’s output by 0.36 mbpd to 0.79 mbpd. Libya’s current output is 0. 2mbpd and if it goes to zero by end of February 2020, OPEC output will remain at 27.88 mbpd in Q1CY20E. However, OPEC may still have to cut output by another 0.85 mbpd to balance the market in Q1CY20, the report said.
From mid January oil prices has fallen over 20 per cent to about $54-55 a barrel.