Talks between Opec and Russia over whether to cut oil production in response to the coronavirus outbreak were threatening to unravel on Friday, sending crude prices plunging more than 5 per cent to their lowest level in three years.
Russia, which has allied with Saudi Arabia and Opec since 2016 to help prop up oil markets, rejected calls from Opec to together curtail almost 4 per cent of global crude production with new output cuts, as a collapse in aviation and transport demand has sent prices down by a third since January.
As the two sides gathered at the Opec secretariat in Vienna, the start of the formal meeting of the so-called Opec+ group was delayed by more than five hours as ministers huddled in private meetings attempting to find common ground.
“A deal certainly can still emerge today, but right now it appears to be hanging in the balance,” said Amrita Sen at Energy Aspects.
On one side Russia briefed that it did not want to do any more than extend the group’s existing production deal, in place since before the coronavirus outbreak, to remove 2.1m barrels a day of oil production. Saudi Arabia has indicated it could walk away from the table unless Russia agrees to participate in a further 1.5m b/d cut.
The stand-off raises the prospect of the four-year-old alliance between two of the world’s largest oil producers weakening at a time when oil demand has slumped and the wider economy is being disrupted by a virus that threatens to become a global pandemic.
The oil industry is bracing for demand to potentially shrink in 2020 for the first time since the financial crisis and a breakdown in the relationship between Saudi Arabia and Russia would threaten even lower prices, which have already fallen by a third to below $50 a barrel since January.
Jamie Webster, an analyst at Boston Consulting Group’s Center for Energy Impact, said that if Opec and its allies did not announce a substantial cut then prices could fall to lows last seen in early 2016, when crude traded near $30 a barrel.
“They have to act decisively or prices are going to sink,” Mr Webster said.
On Thursday, Opec’s core members, not including Russia or other producers who have only allied with the group since 2016, first announced their plan to cut 1.5m b/d if joined by their partners. In a sign of how concerned they are by oil’s slide, they put out a statement late in the evening following additional discussions saying they wanted the deep cuts to last for the entire year, rather than just until the summer.
But as Russian energy minister Alexander Novak arrived back in the Austrian capital on Friday morning for meetings at the Opec secretariat, it became clear Russia was not on board. Tass, the Russian news service, reported the Russian delegation had rejected the plan before talks even commenced.
Saudi Arabian energy minister, Prince Abdulaziz bin Salman, the half brother of the de facto ruler of the kingdom, Mohammed bin Salman, is leading the Opec side in its push to get an agreement on the cuts.
But there are signs the kingdom may be prepared to walk away from the deal, believing the resultant drop in oil prices may eventually force a stronger agreement, while also hurting high-cost rivals like shale oil producers in the US.
“Saudi is willing to entertain a ‘what-if’ scenario in that if Russia doesn’t comply with incremental cuts the silver lining is a ‘reap what you sow’ moment for the oil market,” said Christyan Malek at JPMorgan. “Shale effectively shuts down and inventories fall.”
Russia too has indicated it can live with a lower oil price for a period and can see the benefit in squeezing shale producers, who have captured much of global oil demand growth for the past decade but are already struggling to make a profit.
With investors in the US increasingly wary of funding shale’s expansion, many in the market think now might be the time for countries like Saudi Arabia and Russia to put the sector under pressure by letting prices fall, though this tactic failed in 2014.
Analysts warn it would also be a very risky exercise given the impact of the coronavirus on the world economy.
Energy consultancy Wood Mackenzie estimates oil demand fell by as much as 2.7m b/d in the first quarter, or almost 3 per cent, with China — the world’s second-largest oil consumer after the US — seeing a sharp drop in economic activity as Beijing tried to curtail the spread of the virus.
Brent crude, the international benchmark, fell as much as 5 per cent on Friday to a low of $47.02 a barrel, its lowest since 2017, while US benchmark West Texas Intermediate hit a low of $43.17 a barrel.
Shares in the largest listed European oil and gas majors fell sharply, with BP and Royal Dutch Shell both down more than 4 per cent on the day. They have lost more than a fifth of their market capitalisation since mid-January.
https://news.google.com/__i/rss/rd/articles/CBMiP2h0dHBzOi8vd3d3LmZ0LmNvbS9jb250ZW50LzEwZjNlOWQyLTVmOTQtMTFlYS04MDMzLWZhNDBhMGQ2NWE5ONIBP2h0dHBzOi8vYW1wLmZ0LmNvbS9jb250ZW50LzEwZjNlOWQyLTVmOTQtMTFlYS04MDMzLWZhNDBhMGQ2NWE5OA?oc=5
2020-03-06 14:18:00Z
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