OPEC faces 'make-or-break' decision on oil production

OPEC and its alliesmeet regularly to assess the supply and demand for oil around the globe, but fewgatherings have happened under such volatile and trying circumstances.

COVID-19's spread has weighed mightily on stock markets and oil prices in recent weeks, with experts still trying to assess the riskthe virus poses worldwide.

For OPEC, the situation is another bigtest of the cartel's ability to stabilize oil prices when struck with unexpected turbulence.

"It's very important," said Judith Dwarkin, chief economist ofRS Energy Group in Calgary.

"They're facing a make-or-break decision about how to respond toCOVID-19 disease, which has now spread beyond China and does pose a threat to global public health and the global economy."

While theimpact of theillness on citizens' welfare is a paramount concern, markets are growing increasingly troubled about the blow it will have on world economies.

Global oil prices have fallen 20 per cent since the start of the year asthenovel coronavirushas spread.

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In Canada, a downturn in oil pricesmight not only have an impact on the revenues of oil companies but government coffers, too.

Last week, Albertarevealed a provincial budget built in part on oil prices averaging $58 US a barrel in North America. On Monday, oil prices closed a little above$47 US a barrel.

Members of OPEC and their allies are meeting this week at the group's headquarters in Vienna, Austria.

OPEC,Russia and other producers already have a deal in place to cutoutput from Jan. 1 by 2.1 million barrels per day (bpd), afigure that includes additional voluntary cuts by Saudi Arabia.

But that has not been enough to counter the impact of thevirus on China, the world's biggest oil importer, and on the global economy, as factories are disrupted, fewer people travel and other business slows, curbing oil demand.

"China is the front line for impact in the first quarter [of the year]," Dwarkin said.

"We estimate roughly 900,000 barrels per day has probably been sliced out of China's oil demand. So the need to make a decision to deepen cuts is important."

On Tuesday, officials indicatedthey were considering deeper cuts in a bid to lift crude prices.

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Reuters reported apanel of OPEC and its alliesrecommended cutting oil output by an extra onemillion bpdon Tuesday signalling that Russia and Saudi Arabiawere moving closer to a deal to prop up prices.

Leading into this week's meetings,some experts anticipated the cartel's cut might amount to only 600,000 bpd a figure thatmight have underwhelmed the market given current uncertainty.

Indeed, things are moving quickly and analysts are trying to understand just how the virus' spread willimpacteconomic activity, especiallyconsumer activity.

DentonCinquegrana,chief oil analyst at the Oil Price Information Service by IHS Markit, said it seems like China may be turning a corner, but the virus is only beginning to impact people in the U.S.

"Here, in the United States, you're starting to see a little bit of the panic and spread of the virus start to take place and have an impact on demand," he said.

"The demand impact we may not know for really a couple months down the road."

Cinquegranasaid if OPEC agreedto just the 600,000 bpd cut, Saudi Arabia may go "a little bit on their own" to bring the number closer to onemillion bpd.

"That may be enough to get it back close to the $50-a-barrel level," he said. "But, again, there's some real concerns about demand going forward."

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A cut in U.S. interest rates on Tuesday offered only limitedsupport for crude ahead of the OPEC meetings on Thursday and Friday.

The price of West Texas Intermediate crude, the North American benchmark, closed up 43 cents at $47.18 US per barrel on Tuesday.Brent crude, the global benchmark,fell four cents a barrel to settle at $51.86 US a barrel.

Dwarkinsaid COVID-19 has made OPEC's work an even heavier lift this week.

"But as one former Saudi oil minister said, OPEC is like a teabag," Dwarkin added.

"It works best when it's plunged into hot water.Well, it's definitely in hot water right now."