(Bloomberg) -- OPEC ministers agreed among themselves that oil production should be cut by 1.5 million barrels a day to offset the huge demand hit from the coronavirus epidemic, gambling that they can overcome Russian opposition that could block the move.
Ministers from the Organization of Petroleum Exporting Countries reached an agreement at talks in Vienna on Thursday, delegates said, but Russian Energy Minister Alexander Novak wasn’t present at the conference. On Wednesday, he left the city without giving his support to the production cut favored by Saudi Arabia, instead preferring to maintain current output levels.
A third of the 1.5 million barrel-a-day cut would come from Russia and other non-OPEC allies and the deal is contingent on their backing, delegates said, asking not to be named because the talks were private. Those countries will arrive in the Austrian capital on Friday to discuss an agreement.
If Moscow continues to withhold its support, it’s unclear whether any cut would actually be implemented. Oil rallied initially, then erased gains to trade little changed at $51 a barrel as of 11:42 a.m. in London.
Demand Slump
With oil prices down more than 20% since the beginning of the year, the debate in Vienna between OPEC and its allies 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.
With flights canceled 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.
Saudi Arabia’s push for a big cut reflects that mounting concern. Oil just suffered its biggest weekly slump since the global financial crisis, falling far too low to balance the budgets of most OPEC members.
“We think OPEC+ really needs to cut about 1 million to 1.5 million barrels a day just to put a floor under prices right now,” Allyson Cutright, a director at Rapidan Energy Advisers, said in a Bloomberg Television interview. Ultimately, the Russians will go along with that, but the Saudis “will have to take the majority” of cuts.
The division of cuts between Saudi Arabia and Russia has always been uneven, with the former bearing a larger share from the very start despite the latter having higher production. But the split has become more inequitable with each iteration of the deal. Last year, the kingdom implemented 65% of the group’s total supply reduction on average, compared with just 11% for Russia, according to data compiled by Bloomberg.
The Kremlin has gained a lot from its cooperation with OPEC. The country has been the biggest financial beneficiary of the cuts, largely because it’s 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 the Middle East.
Still, pressure on the alliance is greater than ever and its two dominant nations aren’t necessarily aligned, with Russia only requiring a price of about $40 a barrel to balance its budget.
The coalition is already making deep cuts to offset the U.S. 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, U.S. oil production surged last week to a fresh record, and net American petroleum exports increased to a record of nearly 1 million barrels a day on a four-week average.
The JMMC, which oversees the accord between OPEC and its allies, didn’t choose between the Russian and Saudi proposals, said a delegate, who asked not to be named because the talks were private. 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 on Wednesday.
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