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Oil output set to be slashed

By Philip Smith

Fears that the price of a barrel will continue to fall as demand dries means OPEC is looking at a dramatic 1 million barrel a day cut

Key oil producing nations are openly talking about making drastic cuts in output. It is feared that demand will collapse due to the fallout from coronavirus and force the price down.

The benchmark oil price, which had been as high as $70 a barrel in early January, is already down to $50 a barrel. At lunchtime, the price of Brent Crude was down a further 2.3 per cent and WTI 3.5 per cent.

The Organisation of the Petroleum Exporting Countries (OPEC), the collective of major oil nations, had already talked of a 600,000 barrel a day (bpd) cut to offset an expected drop in demand due to virus-led travel restrictions.

OPEC along with other major oil producers such as Russia, had already cut output by 1.7m bpd in a programme that runs until the end of March. They will agree the next quarter policy next week, but it seems clear which way the producers are looking.

Saudi Arabia – the biggest OPEC producer – along with other producers are looking at a 1 million bpd cut for the second quarter of this year. The Saudis would carry the bulk of the extra drop with Kuwait, UAE and Russia picking up the rest.

Russia, however, has said the response may be premature as the full extent of the impact of the virus will have on the world economy is still not known.

Oil traders fear demand for fuel will be severely curtailed if western governments decide to impose further lockdowns on towns and cities affected by outbreaks. China’s consumption has already fallen by 25 per cent.

If demand continues to fall due to the virus, and production remains at its current levels (or even at levels in line with the originally propose cut), then the price is set to fall still further. Limiting supply will keep the price higher.

FURTHER READING: Coronavirus prompts OPEC to cut forecast for 2020 oil demand growth

FURTHER READING: Oil price predictions for 2020 and beyond

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