The Organization of the Petroleum Exporting Countries (OPEC), agreed on March 5 to cut oil output by an extra 1.5 million barrels per day (BPD) in the second quarter of 2020 to support prices that have been hit by the COVID-19 outbreak but made its action conditional on Russia and others joining in.
Russia and Kazakhstan, both members of the broader and informal group known as OPEC+, said they had not yet agreed to a deeper cut, raising the risk of a collapse in cooperation that has propped up crude prices since 2016.
The oil demand outlook has already been pummeled by global measures to halt the spread of the virus, prompting OPEC to consider its biggest cut since the 2008 financial crisis.
Demand growth forecasts in 2020 have been slashed as factories have been disrupted, people have been deterred from traveling, and other business activities have slowed.
Saudi Arabia has been pushing OPEC and its allies, including Russia, for a big cut up to 1.5 million BPD for the second quarter of 2020, alongside extending existing cuts of 2.1 million BPD, which expire this month, to the end of 2020.
Riyadh, OPEC’s biggest producer, has struggled to win over Moscow. Russian Finance Minister Anton Siluanov said on March 5 that he was ready for a drop in oil prices if there was no deal.
Kazakh Energy Minister Nurlan Nogayev, another non-OPEC producer, said talks were only focusing on extending existing curbs to June.
“Moscow perhaps is underestimating that Saudi Arabia may be ready to walk away if it doesn’t get a positive answer,” said Amrita Sen, co-founder of Energy Aspects think tank.
Russia, which will join talks between OPEC+ states on March 6 in Vienna, has been hesitant in the past in the build-up to meetings but agreed at the last minute.
But OPEC sources have said negotiations with Russia this time have been tougher. Two OPEC sources said on March 5 that, if Russia failed to sign up, there was a risk Saudi Arabia would insist on scrapping OPEC production limits altogether.
OPEC said in a statement after its ministers met that the coronavirus outbreak created an “unprecedented situation” with risks “skewed to the downside,” adding that action was needed.
It said ministers agreed to an extra supply cut of 1.5 million BPD until June, out of which non-OPEC states were expected to contribute 500,000 BPD. The group said this was in addition to extending existing supply curbs to the end of 2020.
Worst Case Scenario
Suhail al-Mazroui, energy minister of the United Arab Emirates, said OPEC would not carry the burden of cuts alone and non-OPEC states had to join in. “We are all in this together. So it’s not going to be us making a decision alone,” he said.
Saudi Arabia, the world’s top oil exporter, is already cutting well beyond its quota under the existing pact, reducing its output by about 10 percent. Russia, with bigger total production, has reduced its output by a fraction of Riyadh’s cut.
Gary Ross, the founder of Black Gold Investors, said a worst-case scenario in which Saudi Arabia returned to full production would send oil prices down to $25 to $30 a barrel.
That would take them to a level that would be painful for OPEC states, already struggling with prices at around $50, and also Russia, which has said it can balance its books at $40.
“OPEC+ have little choice but to cut output substantially given the virus-related demand losses,” Ross said, adding that he expected Russia “will join because it is overwhelmingly in their economic interests.”
Brent oil prices <LCOc1> rose 0.6 percent on news of OPEC’s plan to cut but gave up most of those gains when Russia and others suggested a deal was not in the bag.
The proposed OPEC cut of 1.5 million BPD, if approved, would be well above what the market had expected up until this week. It would bring the group’s overall output reduction to 3.6 million BPD or about 3.6 percent of global supplies.
The last time OPEC reduced supplies on such a scale was in 2008, when it cut production by a total of 4.2 million BPD to address slower demand because of the global financial crisis.
OPEC holds its next ministerial meeting on June 9.
By Ahmad Ghaddar & Shadia Nasralla