The oil price plunged over the past month, as markets continued to assess how the coronavirus outbreak was hitting the global economy and, in turn, oil demand. On 6 March, the OPEC oil basket traded at USD 51.74 per barrel, a 7.1% fall from the same day in February. Moreover, the price was 20.4% lower than on the same day in 2019 and down 23.9% from the start of the year.
The coronavirus has battered industrial activity across China, with the Caixin China general manufacturing PMI declining at the sharpest rate on record in February. Consequently, oil demand has been depressed in recent months—OPEC oil demand projections for this year dropped by 0.25 million barrels per day (mbpd) in February—weighing on oil prices in tandem.
In late February, the outbreak spread outside of China at an accelerated pace, especially in South Korea, Italy, and Iran. According to the IHS Markit global output PMI, activity in eight sectors in February declined at the sharpest rate over the previous month since current records began in October 2009, with the transportation, and tourism and recreation sectors particularly hard hit. Accordingly, at the end of February, the OPEC oil basket fell to the lowest level since September 2017.
Meanwhile, the OPEC+ committee held its scheduled extraordinary meeting on 5–6 March to propose deeper production cuts amid the significant fall in prices since the start of the year. The committee recommended extending the previously agreed 1.5 mbpd output cut until the end of 2020, in addition to proposing another 1.5 mbpd starting in April which would be split proportionally among OPEC and non-OPEC members.
Russia openly rebuffed the proposal and is expected to take a market-share approach to oil output as opposed to price targeting, allowing its oil producers to produce as much as they see fit beginning 1 April, when current oil production cuts are set to expire. This led Saudi Arabia to discount their oil contracts for April by roughly USD 6–8 per barrel to all destinations, in an attempt to gain market share. Saudi Arabia is also expected to ramp up production above the 10 mbpd mark next month—for the first time since June 2019.
A return to a market-share production strategy would mean OPEC+ members could produce as much oil as they wish and also sell at any given price. Back in 2015, OPEC raised production levels to stem the emergence of U.S. shale oil production, which led to a rebalancing in the oil market over the course of a couple of years. Nevertheless, the potential for Saudi Arabia and Russia to broker a deal and return to a price-targeting strategy is still in the cards for this year. Brent crude oil prices declined considerably due to the latest developments and will likely remain hampered in the short term.
In terms of production, combined crude oil output among OPEC members fell from 29.37 million barrels per day (mbpd) in December to 28.86 mbpd in January, mostly reflecting a sharp fall in output from Libya due to strategic blockades at ports and oilfields amid heightened political turmoil. Saudi output increased from 9.68 mbpd in December to 9.73 mbpd in January. Oil production declined among all OPEC members barring Saudi Arabia, Equatorial Guinea, Nigeria and Venezuela in January.
FocusEconomics Consensus Forecast panelists estimate oil production in Saudi Arabia to average 9.85 mbpd in 2020. In 2021, our panel sees crude oil output increasing to 10.15 mbpd.