Russia’s reluctance to jump on board a bigger OPEC production cut may signal a potential crack within the oil producers cartel as delegates from some of the world’s most powerful oil-producing nations meet this week to discuss how best to cushion the impact of the coronavirus outbreak.
In a meeting expected to agree on a deeper round of oil production cuts in an effort to stabilise prices, Saudi Arabia and other members of Organisation of Petroleum Exporting Countries spent most of Wednesday persuading Russia to join with output cuts to prop up prices.
According to sources, Russia is not on board with a proposal of OPEC leader Saudi Arabia that the OPEC+ coalition deepen the collective cut by 1.2 million barrels per day to compensate for lost demand seen by the virus crisis.
Russian Energy Minister Alexander Novak left the OPEC’s Joint Ministerial Monitoring Committee (JMMC) meeting after proposing that OPEC and allied members maintain the current output cuts through the end of the second quarter.
Some key members of the group, most notably OPEC kingpin Saudi Arabia, are thought to be pushing for an output cut of up to 1 million bpd to compensate for lost demand occasioned by the deadly coronavirus crisis. That’s significantly higher than the cut of 600,000 bpd initially proposed by OPEC’s joint technical committee. However, non-OPEC leader Russia has yet to sign off on this strategy.
A significant output cut by OPEC on Thursday could help to normalise oil demand and inventories in the second half of the year. Still, the global slowdown that started several years ago has left the oil industry saturated with large stockpiles.
Johannes Benigni, chairman of JBC Energy Group, told CNBC late last week that the problem for the Saudi-Russian alliance is that while Riyadh might have appetite for higher oil prices, Moscow is “perfectly happy” with crude futures between $50 and $60.
International benchmark Brent crude traded at $51.67 Wednesday morning, up over 1 percent, while U.S. West Texas Intermediate (WTI) stood at $47.75, around 1.2 percent higher.
Iranian Oil Minister Bijan Namdar Zanganeh told reporters in Vienna, Austria, on Wednesday that Russia will decide on production cuts at the very last minute, Bloomberg notes.
Oil prices have fallen more than 20 percent from their early January high, and the sharp drop in demand from China comes as the market was already seeing softness. China has cut off transportation in a number of major cities and grounded all flights. Airlines have cut back flights both to China and Hong Kong.
Russia and Saudi Arabia drove the alliance between OPEC and non-members, like Russia, that was formed in December 2016. At the time, it united the world’s two biggest oil producers and others, in an effort to curb a glut in the world oil market, fuelled in part by the growth of US shale oil.
The US has since surpassed both Russia and Saudi Arabia to become the world’s largest producer. The US industry continues to grow, pumping as much oil as is economically feasible, while the OPEC+ group has struggled with a production cut of 1.8 million barrels a day.
Now with the coronavirus reducing world energy demand, the pressure on OPEC+ is more intense and oil is sliding below price levels that many producers need to support their budgets.
Three meetings are expected to be held between March 4 and 6, 2020. The 18th Joint Ministerial Monitoring Committee (JMMC) took place Wednesday, the 178th Extra-ordinary OPEC Conference will take place today (Thursday), while the 8th OPEC-NON OPEC (OPEC+) takes place tomorrow (Friday).
DIPO OLADEHINDE (Lagos) & HARRISON EDEH (Abuja)
