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Output cuts to stablise oil at $60

Oil price is expected to gain in the near future and likely to stay in the range of $60 a barrel as Opec members are most likely to opt for at least one million barrel per day production cut, deeper than previously predicted, say analysts and industry executives.
Crude prices have declined substantially over the last couple of months due to impact of coronavirus on global economy. Opec members will also hold meeting on March 5-6 in Vienna to discuss additional steps to support the oil market as the economic impact of the spread of the coronavirus risks hurting demand.
But if Opec+ failed to agree on the output cut in line with market expectations, analysts forecast that oil could plunge to $30 a barrel. It "would leave the market vulnerable to a short-term swing below $30 a barrel," Emily Ashford and Paul Horsnell, analysts at Standard Chartered, said in a note.
On Tuesday, oil prices rose for the second consecutive day after six-day decline. WTI was trading at $48.29 a barrel, up 3.3 per cent while Brent gained 3.1 per cent to trade at $53.51 a barrel on Tuesday evening.
Opec and allies led by Russia agreed in December a collective cut of 1.7 million barrels per day to their supply until the end of this month. Saudi Arabia has been voluntarily cutting an additional 400,000bpd, meaning Opec+ is effectively curbing production by 2.1 million bpd.
Leonid Fedun, vice-president of Russian oil firm Lukoil, sees Opec's proposal to cut production by up to 1 million barrels per day will be enough to balance which will push oil back to $60 a barrel. He hinted that Russia could agree to proposal for fresh cuts to output.
"In my view, (a joint) cut of between 600,000bpd to one million bpd is enough to balance the market hit by 'black swans' such as coronavirus. This is enough for oil to rebound to $60 per barrel," Fedun said.
He said coronavirus is a short-lived factor which is affecting oil prices and compensatory measures will be taken at Opec meeting which will take the excess oil off the market and oil price will rebound.
Monica Malik, chief economist at Abu Dhabi Commercial Bank, believes that the key Opec producers in the region (Saudi Arabia, UAE and Kuwait) could see relativity larger output cuts in early 2020 to support the price.
"We expect the output cut to be in the range of 600,000-800,000 barrels a day, taking the total reduction to 2.7-2.9 million barrels per day from the October 2018 base production level - including Saudi Arabia's voluntary cuts. Indications are that Saudi Arabia and some other countries are looking for a 1 million barrels per day output cut for Q2 2020 amidst weakening global demand," Malik said.
She noted that the UAE's average oil production in 2019 was around 1.9 per cent higher than the Q1 2020 Opec+ target, whilst Kuwait and Saudi were producing close to or below their Q1 target.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, expects recovery in crude prices will likely continue on expectation that Opec will announce further production cuts later this week, with or without the support of Russia.
"We could expect a consolidation near $45/48 area on the run up to the March 5-6 meeting. To have a sustainable positive impact on oil prices, the Opec cut should take into consideration the size of the coronavirus-led slump in demand. A cut of 1-million-barrel-per-day may have a limited positive influence," Ozkardeskaya said.
- waheedabbas@khaleejtimes.com