Coronavirus: All eyes on OPEC+

Last week was terrible for all asset classes. Across all geographies, equities had their worst week since the financial crisis in 2008. The impact of coronavirus on the oil price was particularly brutal. Brent briefly undershot the psychologically important $50 mark on Friday night. It has recovered since then and stood at $51.3 per barrel in early European trading on Monday.
The fall in the oil price was drastic. From its high point on Jan. 7 — when US drones killed Iranian General Qassem Soleimani in Bagdad, sprouting geopolitical concerns — to its lowest point on Friday, the commodity had declined a whopping 27.6 percent. That it has not dropped further is surprising, because oil is the premier fuel for transport and coronavirus has decimated travel in Asia, with ripple effects throughout the world. More importantly, it has wreaked havoc in global supply chains as Chinese factories remained closed and recipients of their products had to either curb production or halt it completely.
Saudi Arabia originally wanted to bring the March meeting of OPEC+ forward, the rationale being that it is always better to get ahead of the story. A technical OPEC committee had at that time recommended a production cut of 600,000 bpd above and beyond the 2.1 million bpd which were effectively taken out of the market after last December’s meeting. Alas, Russia was not keen to move the meeting forward. Russia needs a lower oil price than many other countries, so it can afford to be more relaxed. Russian oil companies also want to be able to utilize new built capacity. This is why the influential head of Rosneft, Igor Sechin, has long opposed collaboration in OPEC+ if it results in production cuts.
Russian President Vladimir Putin intimated last week that while he was happy with the current oil price, he would cooperate with OPEC+. This makes sense. For Russia, OPEC+ is more than just about the price of oil. Russia has substantially expanded its geopolitical reach in the Middle East since 2011. The organization gives Moscow an opportunity to cooperate with Saudi Arabia and the UAE, despite being on opposite sides in some conflict areas. The cooperation is well worth the price, especially as Russia never had to bear the brunt of the cuts. On the contrary, Russia has benefited from the cuts more often than not, because revenues from the barrels it had to take out were often smaller that the gains achieved by higher oil prices.
OPEC Secretary Mohammed Barkindo was in Riyadh last week. It was reported that he discussed incremental cuts of 1 million bpd on that occasion. Saudi Arabia would apparently take the big share of the cuts and the UAE, Kuwait and Russia would divide up the remainder.
An additional cut of one million bpd would probably be wise. Whereas 600,000 bpd would have been sufficient in mid-February, the story has moved on and more is needed now. Whether 1 million barrels (3.1 million bpd, if we add the totality of December’s cuts) will be sufficient to calm markets remains to be seen. Some analysts forecast zero demand growth for oil in 2020 — a development which would occur only for the fourth time in as many decades.
The shale patch is suffering under the low prices too: WTI reached a low point of $43.7 per barrel on Sunday, by which time production had fallen everywhere except for in the Permian Basin. It is only a matter of time that the Permian will follow suit, if the situation does not improve.
We should probably look beyond the coronavirus: Once the worst is over there will be a huge demand increase as missed production will have to be made up for. Some of the demand cannot recuperate, namely the consumption during Chinese New Year, foregone tourism and cancelled events, like the Geneva Motor show, which was scheduled to open yesterday.
Most analysts foresee a V-shaped recovery once the worst is over. The question is how deep the lowest point will be and how steep the “V” is going to rise at the other end. We are too early into the story to have a clear indication.
When the economy rebounds there will be another question: How quickly can oil companies bring online shut in capacity? That will be a big determining factor for any recovery, whenever it occurs.

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Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources