By Jeffrey T. Lewis

 

SAO PAULO--Brazilian oil producer Petroleo Brasileiro SA, or Petrobras, said Thursday it will cut production by 100,000 barrels per day by the end of March, the first reduction by a big state-controlled producer since demand and prices plummeted in the wake of the coronavirus pandemic.

Saudi Arabia cut its prices earlier this month after Russia opposed a Saudi plan for the Organization of Petroleum Exporting Countries to reduce output in response to the drop in demand. The Russians said they would boost production in retaliation, ending the country's cooperation with OPEC and helping send the price of a barrel of oil down by about half in a month.

With economic activity grinding nearly to a halt in many countries amid lockdown orders, demand for oil will remain weak for months or longer, analysts say. Global demand for oil will fall to 18.7 million barrels a day in April, according to an estimate by Goldman Sachs.

Given that steep drop in demand, Petrobras's decision to cut output won't resolve the current production glut by itself, but it is a good idea for the company, said Pavel Molchanov, an analyst at Raymond James.

"With prices so depressed, it's a smart move to say we won't be depleting our reserves for $25 a barrel," he said, adding he doesn't expect many companies to follow suit. "Cuts to capital spending are universal, everyone is doing it. But for most companies, if they can generate even a little bit of positive cash flow from producing an extra barrel, they'll produce that barrel."

Rio de Janeiro-based Petrobras has an average oil production cost of $32.10 a barrel, according to Rystad Energy, more than the current price of a barrel of Brent crude. The company said it will continue to evaluate market conditions and make more adjustments to production as needed as part of its response to the impact on demand of the spread of the coronavirus.

"Petrobras is continuously monitoring the internal and external markets, as well as managing inventories and oil refining at its refineries, in line with the variations in market demands," the company said in a note.

Cutting production will also ease pressure on the country's tight storage situation. Brazil has 1.6 days worth of storage available if no production is moved onward, the second-least storage among major oil-producing countries after Nigeria, according to IHS Markit.

Petrobras has spent the past decade ramping up production from its rich new offshore fields, while shutting down or selling off older, less productive fields. It hit record production of 3.025 million barrels of oil equivalent per day in the fourth quarter.

Its production target for this year was 2.7 million barrels of oil equivalent per day, with a variation of 2.5% in either direction depending on market conditions.

The company has also announced a series of other measures to help it adapt to the coronavirus crisis, including shutting down higher-cost platforms in shallow water, postponing a dividend payment announced in February, reducing or postponing 2.4 billion reais ($475 million) of spending on human resources and cutting investment this year to $8.5 billion from $12 billion.

 

Write to Jeffrey T. Lewis at jeffrey.lewis@wsj.com

 

(END) Dow Jones Newswires

March 26, 2020 13:20 ET (17:20 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
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