By Jeph Ajobaju, Chief Copy Editor
Oil producers are losing $500 million a day after the split in OPEC+ alliance slashed prices, amid oil sales slump caused by coronavirus that affects businesses, schools, and airports globally.
A British Member of Parliament (MP), Nadine Dorries, who is Health Minister, confirmed on March 10 she tested positive to coronavirus after attending an event at
10 Downing Street on March 5.
That has sent further jitters down the spine of a British government already concerned about the damage the virus may continue to spread across all sectors of society before a cure is found.
Reuters calculates that with oil erasing over a third of its value this week after a messy breakup of the Organisation of the Petroleum Exporting Countries (OPEC)+ alliance, members of the cartel are bleeding over $500 million a day in lost revenue.
Oil is a top income source for OPEC members and such a dramatic fall in prices will put strain on their economies, some of which such as Iran and Venezuela, are already on the brink.
Some members of the cartel – including Saudi Arabia, Nigeria, Algeria, Iran, and Kuwait – depend almost entirely on oil to fund their budgets.
Brent crude futures were down by as much as 31 per cent to $31.02 on March 9, their lowest since mid-February 2016. At that low, prices were down nearly $20 per barrel (pb) from a high before the meeting of OPEC and its allies on March 6.
This means that in total, and based on their average February production, OPEC members lost more than $500 million in revenue, according to Reuters calculations.
Looming price war
The losses are a lot more pronounced when compared with the high of $71.75 pb that Brent hit in January.
OPEC had been pushing for expanding the existing cuts with its allies, known as OPEC+, by an additional 1.5 million barrels per day (bpd) to over 3 million bpd until the end of the year.
Russia turned the proposal down, causing the collapse of the alliance and the start of a price war over market share.
OPEC members, Nigeria and Algeria, on March 9 said the breakdown of the deal will be painful for producers.
For some nations, including one of OPEC’s richest members, Saudi Arabia, fiscal budget break-even oil prices were already much higher than the oil price before the most recent collapse.
“A $10 a barrel decline in oil prices lowers fiscal revenues by 2-4 per cent of GDP, depending on the country, and fiscal break-even prices are well above current levels for all Gulf Cooperation Council sovereigns,” Jan Friedrich, Head of Middle East and Africa Sovereign Ratings at Fitch Ratings said.
“However, at least the higher-rated sovereigns, particularly Kuwait, Qatar and Abu Dhabi, have ample buffers, mainly in the form of sovereign wealth funds,” he added.
Global drop in oil demand
Oil producers are also facing the biggest drop in demand for their product ever as the coronavirus spreads around the world, forcing OPEC and its allies to consider emergency measures.
Research firm IHS Markit said on March 4 that oil demand will suffer its steepest decline on record in the first quarter – worse even than during the 2008 global financial crisis – as schools and offices close, airlines cancel flights worldwide and a growing number of people hunker down at home.
Most of the reduction in demand can be traced to China, where the coronavirus has caused what IHS Markit describes as an “unprecedented stoppage” of economic activity.
But reduced consumption will be widespread, and IHS Markit expects global demand to drop by 3.8 million bpd in the first quarter compared to 2019. Demand in the first three months of 2019 was 99.8 million bpd.
“This is a sudden, instant demand shock – and the scale of the decline is unprecedented,” Jim Burkhard, vice president and head of oil markets at IHS Markit, told CNN.
The warning came before the critical meeting on March 5 for OPEC members and allied producers in Vienna. The cartel was under pressure to announce yet another round of coordinated production cuts, its preferred method of propping up prices.
Coronavirus fears have already driven oil into a bear market, with Brent crude futures, the global benchmark, trading at $52.65 pb, more than 23 per cent below their recent peak in early January.
US oil is trading at $48.22, nearly 24 per cent below recent highs.
Tough test
Given the current climate, even concerted action by OPEC was not going be enough to stabilise markets.
Goldman Sachs told clients last week that OPEC would need to agree to curb production by at least 1 million bpd in order to avoid a “sharp” sell-off.
Reuters reported that OPEC was expected to cut output between 600,000 and 1 million bpd during the second quarter, while extending existing cuts of 2.1 million bpd — announced in December — through the end of 2020.
Saudi Arabia was still lobbying for support from Russia. Though not a member of OPEC, the country had coordinated production levels with the cartel in recent years.
Global oil prices actually increased two weeks ago in anticipation of the deeper cuts to come.
But the situation remains dire. Goldman Sachs said it now believes that oil demand will shrink in 2020. Before the coronavirus outbreak, it expected demand to increase by 1.1 million bpd.
IHS Markit likewise forecasts that oil demand will contract in 2020, even if there is a recovery in the second half of the year.
Damien Courvalin, a senior commodity strategist at Goldman Sachs, cautioned that OPEC cuts would have to be sustained for prices to start moving up.
Given the global impact of coronavirus, the bank does not expect prices to change course until after April.
“While such cuts will help normalise oil demand and inventories later this year, they can’t prevent an already started large oil inventory accumulation,” Courvalin said in his research note.
