Officials of some of the world's largest oil producers are scrambling to stem a sharp fall in prices over concerns that the growing coronavirus epidemic will reduce demand from China, the biggest importer.
Over the weekend, officials from OPEC as well as Russia agreed to meet today and Wednesday in Vienna, where the Organization of the Petroleum Exporting Countries has its headquarters, to discuss the situation in the oil markets, according to two people briefed on the plans.
The big producers are also discussing whether to schedule an emergency ministerial-level meeting this month, moving up a gathering planned for early March. On the agenda might be production cuts of up to 1 million barrels a day, or about 1% of world supplies, according to a person familiar with the matter.
"They are absolutely trying to put a floor under prices," said Amrita Sen, chief oil analyst at Energy Aspects, a market research firm.
West Texas Intermediate crude oil for March delivery fell $1.45 to settle at $50.11 a barrel in Monday trading on the New York Mercantile Exchange, sinking as low as $49.91 during the session. The U.S. benchmark entered a bear market Monday, which means it is down more than 20% from its January high.
The price of Brent crude, the international benchmark, has fallen about 19% over the past month. The plunge has undercut the effect of the carefully orchestrated production cuts that OPEC announced at its December meeting in Vienna. Brent for April delivery fell $2.17 to $54.45 a barrel on the London-based ICE Futures Europe exchange.
The average U.S. gasoline price per gallon has fallen about 10 cents in the past month to $2.47, according to auto club AAA. In Arkansas, the average price per gallon Monday was $2.20, down from $2.29 a month ago, AAA said.
The virus outbreak in China threatens what could be the largest demand shock since the global financial crisis. The effects are starting to ripple around the globe, as some Chinese refineries slow down or halt operations and cargoes of West African oil are being resold.
Chinese government measures to battle the virus amount to a "major shutdown of the economy" and even with a deeper OPEC production cut it will drive weaker oil balances, Ed Morse, the global head of commodities research, said in a note. "There would be critical knock-on indirect effects for all commodities."
OPEC seems unlikely to stem the price declines soon. Sen said China was already reducing its orders for March from Saudi Arabia, the de facto leader of OPEC and the world's largest oil exporter. It is too late to cut February orders. China is also cutting supplies from Africa and Latin America.
China is Saudi Arabia's most important customer and, along with other Asian countries like India and South Korea, is increasingly vital for the big oil producers around the Persian Gulf. Any slowing of these economies will sap demand for oil, hitting prices and the revenue upon which the OPEC governments depend.
OPEC is likely to make some cuts, Sen said, but that may not be enough to bolster skittish markets.
"People are fearing the worst," she said.
Chinese oil demand already appears to have crashed as the lockdown of Wuhan and other cities and overall fear curb air travel, driving, trucking and factory use. Gary Ross, chief executive of Black Gold Investors, a New York trading and investment firm, estimates that Chinese oil demand over the past two weeks has been down around 2.5 million barrels a day, or close to 20%, compared with the previous year.
Ross said that cutbacks in Chinese oil purchases were likely to ripple across the world, causing supplies to build up in the United States and Europe.
At least for the short term, he said, the oil market has entered "a vicious circle of selling pressure with no hope in sight."
There is much at stake for the big OPEC producers and Russia, as many of them depend on sales to China, particularly now that the United States has turned from major importer to exporter, largely because of shale production.
In December, before the crisis hit, China imported nearly 11 million barrels of oil per day, comparable with the output of a major producer like Russia. A little more than half of Chinese supplies come from OPEC countries. Saudi Arabia was China's largest supplier last year, averaging about 1.7 million barrels a day, or close to a quarter of Saudi exports, according to Energy Aspects. Russia was a close second, with Angola, Brazil and Iraq also feeding large volumes of crude to the Chinese economy.
Analysts say it might not be easy for OPEC to come up with an effective response. For one, it is difficult to predict how long the coronavirus outbreak will last and how much damage it will do to the world economy. Also, output curbs on the order of 2.5 million barrels a day would be unusual for OPEC because such a deep cut would require producers to absorb serious pain. It is also difficult to judge when Libyan volumes, now down about 1 million barrels a day because of political infighting, will return.
The OPEC countries were already selling oil at relatively low volumes after the December agreement. For instance, OPEC exports for January were down about 700,000 barrels a day from the previous month, according to Kpler, a firm that tracks petroleum exports.
OPEC seemed to be trying to prop up the market with talk of a meeting, analysts say, but this tactic did not work.
It will probably be left to top leaders like President Vladimir Putin of Russia and Crown Prince Mohammed bin Salman of Saudi Arabia to sign off on final production cuts.
In a phone call Monday, Putin and Saudi King Salman bin Abdulaziz discussed the global energy market, the Kremlin said in a statement. Both leaders confirmed "readiness to continue cooperation within OPEC+," it said. The kingdom also confirmed the call.
The meeting today in Vienna of technical experts from the OPEC+ coalition, which includes OPEC and other producers such as Russia, will be to evaluate the virus's impact.
The officials' 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.
Information for this article was contributed by Stanley Reed of The New York Times; and by Jackie Davalos, Ilya Arkhipov, Dina Khrennikova, Alfred Cang, Javier Blas, Grant Smith, Saket Sundria and Sharon Cho of Bloomberg News.
A Section on 02/04/2020
Print Headline: OPEC, Russia seek to stem oil-price skid