OPEC awaiting Russia’s decision on deeper cuts due to coronavirus

OPEC awaiting Russia’s decision on deeper cuts due to coronavirus
Photo: Vincent Eisfeld

An extraordinary meeting of OPEC+ stretched into three days last week, as Russia didn’t agree on additional output cuts proposed by the cartel’s Joint Technical Committee (JTC) to compensate for a drop in economic activity aggravated by the coronavirus outbreak. Although Moscow admits that it will have consequences for the oil market, the Kremlin will make a decision only after additional consultation.

Russia generally supports a recommendation to deepen OPEC+ global oil supply curbs to compensate for a drop in demand caused by the coronavirus, says Reuters citing the country’s Minister of Foreign Affairs Sergey Lavrov. However, Moscow is still in consultation to determine “the optimum measures for all market participants”, said the minister. According to Lavrov, President Vladimir Putin and Saudi King Salman bin Abdulaziz Al Saud spoke last week about the new virus undermining energy demand. “Of course, it will have some consequences for the oil market,” commented Lavrov.

OPEC requires Russia’s support to bring a ministerial policy meeting planned for early March forward to February. Last week, the group’s members had an extraordinary meeting in Vienna to discuss the situation. According to Reuters’ sources, the JTC, a technical panel that advises OPEC and its allies, proposed a provisional output cut of 600,000 bpd. The meeting was extended into a third day on Thursday, as Russia signalled a preference for an extension of existing restrictions rather than deeper cuts. Nonetheless, the decision has not yet been made. The sources said that the panel was awaiting Russia’s final position and that ministers would not change the meeting date if there was no agreement on further cuts.

Earlier, Russia had regularly expressed opposition to OPEC before ultimately agreeing on policy during formal meetings, says Reuters. On 4 February, Russia’s Minister of Energy Alexander Novak claimed that he could not say for sure whether it was time to tighten output further.

President Vladimir Putin and Minister of Energy Alexander Novak meeting with Secretary General of OPEC Mohammed Barkindo, October 2019. Photo: kremlin.ru

“The 600,000 bpd has taken into consideration the expected return of Libya oil production and all scenarios for oil demand growth,” said a source at OPEC. He added that the proposed cut was also enough to counter the expected drop in oil demand due to the coronavirus. The economic slowdown due to the virus outbreak is supposed to reduce this year’s global demand growth by 300,000-500,000 bpd, or roughly 0,5%, considers Chief Financial Officer of BP Brian Gilvary. Brent prices have already fallen by more than $11 per barrel this year to $55. OPEC members are worried that the continued spread of the virus can hit oil demand and prices further.

At the moment, OPEC and its allies led by Russia have an agreement to cut crude production by 1,7 million bpd, which expires in March. Besides, Saudi Arabia has been voluntarily cutting its output by additional 400,000 bpd. The JTC also recommended extending current restrictions until the end of 2020.

By Anna Litvina