OPEC MEETING
Venezuela's Oil Minister Manuel Quevedo, Saudi Arabia's Minister of Energy Prince Abdulaziz bin Salman Al-Saud and Russia's Energy Minister Alexander Novak are seen at the beginning of an OPEC and NON-OPEC meeting in Vienna, Austria December 6, 2019.
(Photo: REUTERS/Leonhard Foeger/File Photo)

OPEC has forecast weaker oil demand growth for the rest of 2020 due to significant demand reduction caused by the  Covid-19 outbreak in China.

In a new report, OPEC identified the massive disruption to business in China -- the world's largest oil importer -- caused by the outbreak as the "major factor" behind its decision to slash its outlook for global oil demand growth to 0.99 million barrels per day (bpd) for this year. This lower estimate released Wednesday is 0.23 million bpd smaller than the previous month's projection.

OPEC's Joint Technical Committee advising the producers has recommended a 600,000 bpd reduction in oil production to bring relief to the energy market. Oil industry analysts concur Covid-19 poses the greatest demand threat to the global oil industry since the Great Recession of 2008.

Oil demand from China has fallen sharply as local businesses scale back operations due to fears over contagion from the Covid-19. China's oil demand is estimated to have fallen by a massive three million barrels per day (bpd). Analysts say the huge drop in oil demand this time was ignited by demand destruction and not over supply concerns as in the past.

"The coronavirus has completely taken the oil market hostage," said Michael Tran, director of global energy strategy at RBC Capital Markets. "The market is watching what OPEC does with bated breath. If OPEC is not able to stick the landing, it will have a big psychological hit to the market."

The weaker forecast will support OPEC's case to impose additional output cuts as quickly as possible despite opposition from Russia that wants oil output ramped-up. OPEC is still pushing for an emergency meeting with non-OPEC partners such as Russia to cut oil production to offset the impact of the coronavirus. The meeting was to have been held earlier this month. Russia has not agreed to the proposed new cuts, however.

In defying OPEC, Russia said it needs more time to study recommendations from the OPEC's technical committee and assess the impact of Covid-19 on the market. Instead of demanding Russia toe the line, OPEC instead put forward with a compromise proposal that will see Saudi Arabia cut oil production by 600,000 bpd, down from 800,000 to one million barrels.

In its new report, OPEC said the impact of the Coronavirus outbreak on China's economy "has added to the uncertainties surrounding global economic growth in 2020, and by extension of global oil demand growth in 2020."