Opec plays Russian roulette with 1.5mn b/d cuts

Opec member countries are meeting allied producers in Vienna today, tasked with the challenge of persuading Russia and other non-Opec partners to sign up to a collective output cut of 1.5mn b/d for the remainder of the year.

Yesterday Opec initially agreed to recommend that the Opec+ group should deepen cuts by 1.5mn b/d in the second quarter, before returning to existing quotas in July-December. But in an unusual development, it adjusted its recommendation late last night to span until the end of 2020.

Opec proposes taking on 1mn b/d of the extra cuts, contingent on its non-Opec partners shouldering the remaining 500,000 b/d. The cuts would be distributed "pro-rata", with Libya, Venezuela and Iran retaining exemptions in light of their internal security and economic circumstances.

Opec's recommendation to cut deeper comes in the wake of the coronavirus outbreak, which has slashed global crude demand — particularly in China, a key buyer for many of the group's members. Chinese refiners lowered February crude runs by 3.3mn b/d on the month, according to an Argus survey. Opec now forecasts global oil demand growth of just 480,000 b/d this year, compared with its projection of 1.1mn b/d at the time of the previous Opec+ meeting in December.

Russia was not on board with the 1.5mn b/d proposal when it was discussed by the Opec+ group's Joint Ministerial Monitoring Committee (JMMC) on 4 March, although Iranian oil minister Bijan Namdar Zanganeh said yesterday that Moscow has not formally dismissed the idea.

"I am optimistic that we will reach something today," UAE oil minister Suhail al-Mazrouei said ahead of today's meeting. "I cannot see us not agreeing." But al-Mazrouei stressed that the meeting will not prove easy and that he "cannot see us unilaterally as Opec doing a deal" in the absence of non-Opec support.

One Opec+ delegate said Russia's concerns about further cuts are linked to its belief that falling global oil demand growth can be resolved through financial stimulus packages, and not reactionary oil market measures. Deeper production cuts could also force Russia to completely shut down some facilities, which would be difficult to restart because of the cold weather.

Russia is unlikely to oppose either an extension of the existing Opec+ agreement or a deal that allows it to keep its current output ceiling while other participants lower theirs, according to one delegate.

By Ruxandra Iordache

source: Argus Media