Under the proposal, OPEC proposed its members slash production by 1 million barrels per day, seeking an additional cut of 500,000 barrels per day from non-OPEC producing countries participating in the Declaration of Cooperation, such as Russia.
The move is aimed at curbing the impact of the COVID-19 outbreak on global economic and oil demand forecasts in 2020, particularly for the first and second quarters.
OPEC said that the global oil demand growth in 2020 is now forecast to be 0.48 mb/d, down from 1.1 mb/d in December 2019.
The conference noted that the further impact of the COVID-19 outbreak on oil market fundamentals necessitates further continuous monitoring.
“OPEC’s recommendation sends a strong message. It is a good decision, but its success hinges on compliance,” Ann-Louise Hittle, vice president, Macro Oils at Wood Mackenzie said.
“It shows the producers’ group is serious about getting on top of the oversupply in the market. Compliance itself probably won’t be full, but even moderate adherence should be enough to stabilize the market through the second quarter.
“However, if the demand loss we are experiencing continues into the second quarter, the group may need to revisit the cuts and reassess them.”
In WoodMac’s estimates, world oil demand is expected to fall 2.7 million b/d in the first quarter. China’s demand alone is expected to fall by 2.3 million b/d in the first quarter.
“The drop in global demand is the most severe the market has seen since the fourth quarter of 2008, at the height of the global economic crisis,” she added.
“Whether Russia will agree to the cuts is the million-dollar question. Russia hasn’t signed on yet and as the leader of the non-OPEC group, their agreement is key. Given their history of co-operation with OPEC, we expect they will agree. Russia could, at the very least, hold production flat during the second quarter.”
It is yet to be seen how the tanker market would be impacted by the announced cuts.
Tanker rates have already plummeted amid lower demand from China as well as the lifting of sanctions against Cosco Shipping Tanker (Dalian), resulting in re-entering of vessel capacity onto the market.
What is more, tanker earnings have taken a hit from the higher cost of fuel caused by the implementation of
the IMO 2020 sulphur cap, especially for vessels that switched to low-sulphur fuel.
Average daily earnings for very large crude carriers (VLCC) were at USD 23,797 per day on February 7, having dropped from USD 94,286 per day at the start of January. By the beginning of February, Suezmax earnings stood at USD 33,756 per day and Aframax at USD 22,036 per day, data from BIMCO shows.