As the spreading Covid-19 epidemic takes its toll on the global economy, OPEC member nations on Thursday agreed to make further steep cuts in oil production — but only if Russia, a nonmember, goes along.
Saudi Arabia pushed hard for the cuts, and at its meeting in Vienna Thursday the cartel decided to reduce oil output by 1 million barrels a day, contingent on nonmembers similarly making a cut of 500,000 barrels a day. In practice, the burden for the latter would fall on Russia.
But Russian President Vladimir Putin said Sunday that his country can deal with oil prices in the $50 range, down from nearly $60 in the past two weeks. The Russian representative to OPEC, Alexander Novak, walked out of a preliminary meeting in Vienna on Wednesday, when the cuts were being discussed. According to Russian press reports, he is expected to return with Moscow’s answer on Friday.
“It was a pretty big power move from the OPEC leadership to announce such a sizable production cut without getting pre-approval from Moscow," Helima Croft, an analyst with RBC Capital Markets, wrote in an email. “It sort of backs Russia into a corner. Say no and the whole OPEC+ marriage could crumble.”
Kazakhstan, a smaller oil producer in the OPEC+ group, was also resistant to making cuts.
No one questions that demand is falling.
China’s independent refineries cut imports for crude oil by nearly 20 percent in February, S & P Global Platts, an energy analysis firm, reported Thursday. With the virus now spreading outward from China, the company said that European jet fuel values have dropped to their lowest level since November 2015.
The research company IHS Markit cited “the unprecedented stoppage of Chinese economic activity in February” and the current global spread of the covid-19 virus as it forecast a sharp drop in oil consumption.
It predicted that oil demand for the first quarter of this year would be 3.8 million barrels a day lower than during the first quarter of 2019. Before the coronavirus emerged, analysts were predicting an increase of 700,000 barrels a day over the rate a year ago.
“Never before,” the firm said in a note, “has such a quarterly drop been recorded.”
Yuri Barsukov, an oil and gas analyst at the Kommersant newspaper in Moscow, noted that the covid-19 epidemic was widespread in the Middle East but not so in Russia, suggesting that as a result the Middle Eastern nations are almost certain to cut production in any case as public health restrictions on travel and work take effect. That could persuade the Kremlin to sit back and watch without reducing its own production.
But Croft noted that Russia benefits significantly from its association with OPEC, not least in the prestige that goes with it, and would be unlikely to risk that. At the same time, she pointed out that Saudi Arabia will almost certainly not back down in the face of a Russian refusal, because it can’t allow Moscow to be seen as calling the shots from outside OPEC.
For the Saudis, said Greg Priddy, an analyst with Stratfor, which calls itself a geointelligence platform. this issue is much more acute than it is for the Russians.
“A few dollars lower from where we are now for a few months isn’t going to hurt Russia,” he said. Putin, he said, has a “clear-eyed view” that he is willing to get a lower price if Russia can maintain or expand its market share.
But in the three years of the OPEC+ arrangement, he said, there is a growing feeling among OPEC countries that Russia has enjoyed a considerable advantage.
“This tension has been building for some time,” he said. “The core members of OPEC are looking back at Russia and saying, ‘You need to do something.’”
He predicted that Russia will likely agree to a smaller cut than it would have been required to make under the Thursday agreement.
The new tentative cuts would not apply to Iran or Venezuela, both under U.S. sanctions.
Brent crude was trading at just under $50 a barrel Thursday, down from nearly $59 on Feb. 20. OPEC produces about 40 percent of the world’s 100 million-barrel-a-day consumption. Russia produces about 11.4 million barrels a day.
“The Covid-19 outbreak has had a major adverse impact on global economic and oil demand forecasts for 2020,” OPEC said in a statement, “particularly for the first and second quarters.”
It said the expected growth in oil consumption this year has been cut by more than half since the previous forecast was made in December.
The proposed cut would be in effect through the second quarter of this year. It would effectively double a reduction in oil output for the first quarter of this year that OPEC ratified in December and extended Thursday. Russia has indicated that it does not object to the continuation of that earlier cut.