Barrel support: how the first OPEC meeting in 2020 could affect oil prices

On Thursday, March 5, the most anticipated and most significant event for the entire global energy market, the OPEC ministerial meeting, starts in Vienna, after which on March 6 senior representatives of the countries participating in the OPEC + transaction will join them. Within two days, ministers of oil exporting countries will discuss the fate of the agreement to reduce hydrocarbon production.

The event takes place against the backdrop of a massive collapse in world oil prices in recent months. If at the beginning of January 2020 the cost of raw materials of the Brent reference brand exceeded $ 70 per barrel, then already at the end of February the value fell below $ 49. The last time a similar indicator could be observed in the summer of 2017. This is evidenced by the ICE exchange in London.

At the same time, in anticipation of the meeting of countries - producers of raw materials, oil quotes stopped falling and stopped in the region of $ 51-53 per barrel. As Natalia Milchakova, deputy head of Alpari’s information and analytical center, explained to RT, investors are optimistic and expect the meeting participants to stabilize the market.

“This time, investors’s attention was riveted to the event, since the decision to reduce oil production by OPEC + usually helps to strengthen energy prices. This is especially important now that in the last week of February alone, oil lost almost 15% of its value, ”the analyst explained.

Recall that from January 1, 2020, members of the OPEC + alliance, including Russia, reduce production by 1.7 million barrels per day compared to the level of October 2018. The fulfillment of the terms of the contract was supposed to restore the balance of supply and demand in order to keep prices from significant fluctuations. However, market pressure was exerted by the unexpected spread of coronavirus in the world.

At the end of December 2019, authorities in Chinese Wuhan reported an outbreak of a respiratory infection of unknown origin. According to local experts, the cause of the disease was a new type of coronavirus. To date, according to the State Committee for Health of China, the number of people infected in China has exceeded 80.4 thousand, more than 3 thousand of them have died.

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According to recent estimates, the total number of infected people in the world has reached 94.1 thousand. Outside of mainland China, the most cases have been reported in South Korea (5621 people), Iran (2922), Italy (2502) and Japan (1001 people, including those infected from the cruise ship Diamond Princess).

According to experts, the spread of the disease risks causing a massive reduction in trade, passenger traffic and fuel consumption. Thus, the threat of a decline in oil demand triggered a fall in market prices.

According to RT expert on stock market “BCS Broker” Igor Galaktionov, to solve the problem, the participants in the OPEC + transaction will have to further reduce oil production. According to the expert, within the framework of the meeting, the countries will discuss the possibility of additional reduction in oil production in the amount of 600 thousand to 1 million barrels per day.

“The final decision will depend on the ability of the countries of the alliance to agree, since not all parties to the discussion like the idea of ​​a new reduction in raw material production. In the current situation, the market lays in its estimates an additional volume of production decline of 600 thousand barrels per day. If the final value is higher, oil prices may accelerate growth, ”Galaktionov said.

Note that the current OPEC + agreement is valid until the end of March 2020. However, according to the results of negotiations, the meeting participants can extend the deal until July, Natalia Milchakova believes. As expected, such a decision could be an additional reason for the rise in price of oil.

OPEC + itself also previously recognized the need to continue cooperation after March. The statement was made by the Minister of Oil and Gas of Oman, Mohammed bin Hamad ar-Rumkhi. In his opinion, the contract should be extended until the end of 2020.

Transaction price

In general, if the parties agree on an additional reduction in oil production and on the extension of the transaction, oil prices within a month will be able to return to the level of $ 57-60 per barrel. This point of view is shared by the head of the analytical department of AMarkets Artyom Deev. However, as the expert notes, further price dynamics will largely depend on the situation with coronavirus.

“At the end of 2020, the average oil price may be about $ 50–55. Now, there is still a risk that in the event of a negative development of the situation with the growth of the coronavirus epidemic in the world, prices may start to decline again during the year, ”the expert noted.

However, analysts consider such a development unlikely. According to Igor Galaktionov, already in the spring, the spread of the coronavirus may slow down, and against the background of support for OPEC +, oil prices will begin to rise.

“According to preliminary forecasts, the epidemic may decline in April. If such a scenario is realized, then, ceteris paribus, the average price of Brent oil in 2020 may be in the range of $ 57-59 per barrel, ”Galaktionov concluded.