Oil
OPEC will need Russia to come up with a favourable response to more production cuts to shore up oil prices. Image Credit: Reuters

Vienna (Bloomberg): OPEC expects Russia to respond in days, rather than weeks, to a production-cut proposal as it confronts a price rout triggered by the collapse in petroleum demand from China. The OPEC+ alliance, which controls about half of the world’s oil production, is facing one of its biggest ever tests as the coronavirus outbreak in Asia sent oil prices to one-year lows this week.

In response to the epidemic, technical experts from Organization of Petroleum Exporting Countries and its allies recommended a further supply curb of 600,000 barrels a day until June. In addition, the technocrats recommended that the current 2.1 million barrel-a-day cut already in place be extended until the end of the year, rather than expiring in March as originally planned.

The proposal from the group’s Joint Technical Committee can’t take effect until it’s agreed on by ministers. In a potential sign of the trouble ahead, the technocrats didn’t set a date for emergency ministerial talks this month.

As the coronavirus caught the attention of the oil market, Brent crude has fallen more than 15 per cent so far this year to trade near $55 a barrel.

Bring the date forward

Saudi Arabia had requested an early meeting, but throughout this week Russia remained non-committal and suggested meeting again in early March, as initially scheduled. That stance continued on Thursday as Russian Energy Minister Alexander Novak said his country was still assessing the impact of the outbreak and hasn’t decided on an appropriate response.

Yet, an OPEC delegate said the group was expecting Moscow to make up its mind in the next few days, potentially as soon as over the weekend, once Novak had the time to consult with the Kremlin.

Nothing new

The conflicting dynamic between Saudi Arabia and Russia is not new. Since the OPEC+ alliance was created three years ago, the two sides have disagreed about whether to cut production, often publicly, but have ultimately found a way to compromise. “If OPEC wants a decisive break from the current bearish sentiment, it would have to consider deeper cuts,” said Amrita Sen, chief oil analyst at Energy Aspects Ltd..

The coronavirus is still spreading rapidly and its impact on oil use is uncertain. Estimates of how much demand will be wiped out in the coming months vary widely, with OPEC’s internal analysis predicting a modest impact of no more than 400,000 barrels a day, but outside estimates showing a much bigger hit.

“The magnitude of the demand shock we’re seeing is on par with ‘08-’09,” Jeffrey Currie, global head of commodities at Goldman Sachs Group Inc., said, in a reference to the financial crisis a decade ago. During that meltdown, oil prices plunged from above $140 a barrel to less than $40.