OPEC is putting too much pressure on oil, market experts say. It's time to let it float, and the market will balance the price itself.
China is one of the largest importers of crude oil in the world, but due to the coronavirus epidemic, market participants are afraid that this fact may slow down the growth of the world economy and bring down oil quotations. To date, a serious problem has arisen in the demand for aviation fuel because of the reduction of air traffic in China.
OPEC has quite predictably held a meeting in Vienna to discuss the need for even greater reductions in oil production in the coming months. Each time, they are more and more engaged in manual management of production quotas. Previously, OPEC and other major oil-producing countries agreed to reduce daily production due to excess reserves in the States and fear of trade wars, now due to coronavirus.
Also, there is a growing interference in the market by Opec+. Yes, this mechanism is good at supporting the price of oil and is increasingly being resorted to, but on the other hand, a market system that requires frequent outside interference is not sustainable. Soon it will be necessary for OPEC+ to loosen the reins and let oil float.
The first step is to let go of the oil prices, there is no other way. Black gold has lately been worse than other assets, confirming market concerns and is also recovers worse. But there is another side of the coin - acceleration of growth of the world economy due to a sharp drop in oil prices. An extreme example of this effect of oil on the world economy is the speedup of growth in 2017, after the extreme lows in early 2016. Today, this is what the world needs as much as the OPEC+ countries.
There are now reports from various information sources that negotiations between OPEC members and their allies have been delayed for 3 days due to differences of opinion between Saudi Arabia and Russia on how the Asian coronavirus affects the global oil demand.
According to delegates, the results of the meeting have not yet succeeded in breaking Russia's reluctance to make new oil cuts. Saudi Arabia is pushing the cartel to reduce daily oil production, as the new virus affects the demand for oil in China. Therefore, on expectations that the coronavirus will hit the world's largest importer in terms of oil demand and consumption, oil quotations decreased significantly, which made Saudi Arabia advocate for taking urgent measures. Negotiations in Vienna gave the market hope that the reduction of production may soften the blow to the black gold, as a result of which oil prices rose slightly. Brent rose by 2.2% as of 12:20 after a 2.5% growth in the previous session.
It is difficult to determine the real impact of the virus on oil prices, which makes it difficult for the cartel to agree on the decision. OPEC's internal analysis predicts a weak impact, but sources from outside say it will be the biggest blow to consumption since the 2008 crisis.