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OPEC+ at risk of falling apart? Saudis and Russians butt heads over oil cuts

PortandTerminal.com, February 28, 2020

Not even a 20% decline in oil prices over the past four weeks has convinced Russia to act on a proposal from Saudi Arabia to aggressively cut production by a further 600,000 bpd. Delegate warns no-deal could mean the end of OPEC+

LONDON–  Saudi Arabia and Russia will meet in Vienna next week to debate another round of production cuts to stem the oil market’s COVID-19 rout.

READ: China Oil Demand Has Plunged 20% Because of the Virus Lockdown

Oil prices have fallen about a quarter since late January, when news of the coronavirus outbreak began spooking traders, with the sell-off accelerating this week to hit a nearly three-year low. Saudi Arabia wants to OPEC members cut production to prop up prices.

Oil prices have fallen by 20% over the past 4 weeks trading at $45.25 a bbl on February 28.

One source familiar with the talks said Saudi Arabia now supports an even deeper cut of 1 million bpd in oil output, significantly more than the 600,000 bpd that is currently being discussed. But Russia isn’t on-board with even the lower number.

So far, not even a 20% decline in oil prices over the past four weeks has convinced the Kremlin to act on Saudi Arabia’s proposal to aggressively cut production.

“If Russia is not on board, the Declaration of Cooperation means nothing in the future,”

Russia's Energy Minister, Alexander Novak wearing suit, standing in front of OPEC sign
Russia’s Energy Minister, Alexander Novak

Russia has yet to declare how it thinks the producer group should respond to the coronavirus, though energy minister Alexander Novak on Thursday sought to downplay notions of a rift, saying Moscow was “very satisfied with cooperation with our partners from Saudi Arabia, and naturally, we want to continue to cooperate.”

The coronavirus has sparked panic within many OPEC members, with Saudi energy minister Prince Abdulaziz bin Salman earlier comparing the oil market skid to a “house on fire,” at an energy symposium earlier this month, according to people who heard his remarks.

Saudi Arabia is in the midst of aggressive structural reforms and has a now publicly traded state oil company to support. The prince has been urging other members to extend and deepen their 1.7 million b/d OPEC+ production cut accord, which expires at the end of March. Saudi leaders have spoken with Russian counterparts several times over the last month to try to strike a deal.

READ: Saudi Aramco IPO: “This is the absolute mother of all oil and gas companies.”

But despite heavy lobbying by Saudi Arabia, the 23-country coalition of OPEC and non-OPEC producers has yet to agree on any plans to rein in crude oil production further. Russia, the key non-OPEC partner in the deal, appears relatively nonplussed by the market plunge, given its higher fiscal tolerance for lower prices.

READ: Chinese Refiners Go on Buying Spree as Oil Too Cheap to Ignore

In August 2019 Bloomberg reported that Russia’s budget for the year balances at a price of $49.20 a barrel for Urals crude, Russia’s main export blend, the lowest break-even level in more than a decade, according to Alexandra Suslina, a budget specialist at the Economic Expert Group, a Moscow think-tank that frequently advises the government. That puts it close to the bottom of the rankings of major oil producers by that measure.

“If Russia is not on board, the Declaration of Cooperation means nothing in the future,” one OPEC delegate said on condition of anonymity.

What is OPEC+?

OPEC+ is a group of 24 oil-producing nations, made up of the 14 members of the Organization of Petroleum Exporting Countries (OPEC), and 10 other non-OPEC members, including Russia. 

The OPEC bloc is nominally led by Saudi Arabia, the group’s largest oil producer, while Russia is the biggest player among the non-OPEC countries.

The format was born in 2017 with a deal to coordinate oil production among the countries in a bid to stabilize prices. Since then, the group has reached deals for members to voluntarily cut and ramp-up production in response to changes in global oil prices.

OPEC accounts for around one-third of the world’s oil supply, with the non-OPEC members bringing the total share of global oil covered by the deal to just under half. The world’s largest energy producer, the U.S., is not part of the deal, nor is China or other leading Western producers such as the U.K., Canada and Norway.

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