OPEC+ stuck yet again as Saudi Arabia and Russia disagree on output cuts

The OPEC+ found itself stuck yet again, after a day of talks that ended with its two most important members split over whether they should deepen production cuts to offset the huge demand hit from the coronavirus epidemic.

With oil prices down more than 20 per cent since the beginning of the year, the debate between Russia and Saudi Arabia was being closely watched across the energy industry.

The fortunes of resource-dependent economies from Africa to Asia, as well as corporate giants like Exxon Mobil Corp and shale drillers in Texas, could turn on the cartel’s decision.

Riyadh and Moscow were far apart after Wednesday’s meeting of the OPEC+ Joint Ministerial Monitoring Committee in Vienna, delegates said. The kingdom’s Energy Minister Prince Abdulaziz bin Salman was pushing for a supply reduction as big as 1.5 million barrels a day. His Russian counterpart Alexander Novak favoured maintaining output at current levels through to the end of the second-quarter.

“The Committee did make a wonderful recommendation on oil policy,” Prince Abdulaziz told reporters. However, he declined to reveal the details, saying he preferred to maintain suspense.

The JMMC, which oversees the accord between the Organisation of Petroleum Exporting Countries (OPEC) and it allies, did not choose between the Russian and Saudi proposals, said a delegate, who asked not to be named because the talks were private. “Instead, it has been left to OPEC’s full ministerial meeting on Thursday to consider both approaches.”

Brent crude rose 1.5 per cent as of 1:29 PM in Singapore on Thursday, but is still down 21 per cent this year.

Far apart

It is not the first time that the two biggest producers in the OPEC+ coalition have appeared to be far apart just days before crucial decisions on oil production. Yet since the group was formed in late 2016, the two nations have usually found a way to resolve their differences and forge a common policy that supports crude prices.

The Kremlin has gained a lot from its cooperation with the OPEC. The country has been the biggest financial beneficiary of the cuts, largely because its borne a lesser share than Saudi Arabia. The alliance has also significantly enhanced President Vladimir Putin’s presence on the world stage and his political clout in West Asia.

“We see more reasons for Russia to cooperate than not, at least for now,” said Matthew Holland, an analyst at consultant Energy Aspects Ltd. However, the Russian contribution to additional cuts is likely to be nominal, unless Riyadh can offer a large carrot.

“Moscow is likely to wait until the last moment to make any decision on whether to back deeper cuts,” Iranian Oil Minister Bijan Namdar Zanganeh told reporters before Wednesday’s talks.

‘Unprecedented’ decline in demand

Still, pressure on the alliance is greater than ever and its two dominant nations are not necessarily aligned.

Saudi Arabia’s push for a big cut reflects mounting concern that growth in fuel consumption could be wiped out this year as the coronavirus outbreak wreaks havoc on the world economy.

Oil just suffered its biggest weekly slump since the 2008 global financial crisis, falling far too low to balance the budgets of most OPEC members, but not Russia.

“This is a sudden, instant demand shock,” said Jim Burkhard, vice president and head of oil markets at IHS Markit Ltd. “The scale of the decline is unprecedented.”

The coalition is already making deep cuts to offset the US shale boom, agreeing on a fresh supply reduction of 2.1 million barrels a day as recently as December. OPEC’s output last month was the lowest since 2009, when the group implemented the sharpest production cuts in its history at the depths of the global financial crisis.

As OPEC+ debated further production cuts, US oil production surged last week to a fresh record, and net American petroleum exports increased to a record of nearly one million barrels a day on a four-week average.

“This raises a red flag for some OPEC+ members in Vienna, as the US consolidates its status as a global oil exporter, eroding the market shares of Russia and Saudi Arabia,” said Ed Morse, head of commodity research at Citigroup.

Coronavirus crisis

With flights cancelled in Europe, schools closed in Japan, towns quarantined in Italy and a rising death toll from Iran to Washington state, the coronavirus crisis has gone global, and with it, its impact on energy demand.

For only the fourth time in almost 40 years, oil consumption may not grow at all in 2020, according to a growing minority of traders, investors and analysts. Goldman Sachs Group Inc on Tuesday became the first major Wall Street Bank to forecast a contraction in demand this year.

As well as seeking to forge a deal, members of OPEC+ are also grappling with the risks of bringing together delegations from 23 nations as the disease continues to spread. Medical advisers screened staff and delegates to check for high temperatures and some employees were told to work from home. OPEC told national delegations to limit their size to the bare minimum.

Amid the difficult circumstances, OPEC Secretary-General Mohammad Barkindo and Russia’s Novak sought a moment of levity, posting on Twitter a video of themselves performing a handshake with their feet, in keeping with guidelines to avoid bodily contact that could spread the virus.

OPEC has taken the unprecedented step of blocking journalists from entering its headquarters, and has also scrapped the final press conference in favour of a webinar. The cartels gatherings typically attract a contingent of hundreds of officials, reporters, TV crews, analysts and consultants from around the world.

COMMENT NOW