From the Economist's Chair

Author David Fyfe, Argus Chief Economist

Nailing jelly to the wall…continuously: Uncertain times call for exceptional measures. That’s what confronts Opec+ producers as they meet on 5 and 6 March in Vienna.

Possibly due to coronavirus, perhaps just shy of the press spotlight, Ministers this time around decided to meet free from direct media gaze, an arms-length strategy that was already becoming apparent during the last meeting in December.

The hard reality is that Opec needs to produce at least 1 mb/d less in 2020 than last year if it wants to keep stock-builds in check and defend a price floor anywhere near $50 Brent. The coronavirus, even if largely confined to first-half 2020, looks likely to push global GDP growth down towards a +2% level commonly associated with mild recession.

SD balance

This week’s pre-emptive Fed rate cut spoke volumes for policy makers’ disquiet. Annual oil demand growth may now lag 2019’s already-anaemic 750 kb/d. An illustrative scenario here of +0.5 mb/d y-o-y growth arguably has more downside than upside risk to it.

What began as a supply-side hit on China’s economy in February could now cripple services and the global economy’s demand-side if pandemic looks likely and travel, tourism and consumer spending bear the brunt of widespread restrictions on movement.

Opec's conundrum

February Opec production looks to have dropped well below 28 mb/d, largely due to the blockade now hampering Libyan exports. This potentially offsets some of the hit suffered by global demand. Ominously, however, February production from Iran, Iraq, Nigeria and Venezuela may have nudged higher month-on-month.

And February developments also highlight the dynamic that has characterised producer strategy in the post-market share period: Saudi Arabia and fellow GCC producers restraining output, volatile Russian supply, and most of the “heavy lifting” required to keep inventory in check amid slowing demand growth coming from involuntary cuts to Iranian, Venezuelan and Libyan exports.

Before coronavirus struck, Argus foresaw a relatively benign 2020 scenario for Opec and its fellow travellers: slowing shale growth, healthy recovery in oil demand growth to north of 1 mb/d and a prospect for gradual market share recovery, if not this year, then perhaps in 2021 and 2022.

With warring factions in Libya appearing as far apart as ever, what’s required of other producers currently doesn’t look impossible. But any sign of supply recovery from Libya, Iran or Venezuela, however unlikely it seems today, or a steeper demand hit, could tip other Opec producers beyond where they’re prepared to go.

A floor for prices is achievable, so too a floor for market share, just not necessarily both at the same time. Nailing jelly to a wall, indeed.     

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