Opec to cut oil production as coronavirus hits
Plummeting prices mean oil-selling nations want production cut, but they must act together and Russia seems reluctant
The coronavirus outbreak has led to a huge reduction in travel, manufacturing, and other economic activities, all of which have impacted the world’s demand for oil.
With supply far outstripping demand, the price of oil is falling fast, and amid alarm over a further collapse, the 14 countries that make up the Organisation of the Petroleum Exporting Countries (Opec) convened in Vienna yesterday to coordinate a response.
The solution they reached was to take 1.5 million barrels per day off the market, reducing supply with the aim of pushing up prices that are now hovering around $50 a barrel, down from nearly $60 two weeks ago.
“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.”
There is already an existing Opec reduction of 2.1 million barrels per day in place, and that is due to expire at the end of March; yesterday’s conference proposed keeping this cut extended to the end of the year in addition to the new one.
“It would bring the group’s overall output reduction to 3.6 million bpd or about 3.6 percent of global supplies,” says Al Jazeera. “The last time Opec reduced supplies on such a scale was in 2008 when it cut production by a total of 4.2 million bpd to address slower demand because of the global financial crisis.”
However, the agreement has a condition, namely that Russia, which is not a member of Opec, agrees to cut their own production too, and Moscow is proving resistant to attempts to convince them to do so.
Russia and other non-Opec members, which alongside the organisation are referred to as Opec+, are expected to shoulder a third of the cuts, and reduce their output by a total of 500,000 bpd.
Moscow seems to be weighing up the pros and cons of signing on to the agreement. Maintaining production while others cut theirs is a reliable way of increasing long-term market share, and with coronavirus rampant in the Middle East, they may think if they hold their nerve then Saudi Arabia-led Opec may cut production without them.
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On the other hand, failing to act in tandem with Opec could mean the end of their involvement with Opec+, a prestigious affiliation that brings influence over global oil policy.
The Washington Post reports that “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.”
Gary Ross, founder of Black Gold Investors, believes that, in the end, Russia will be compelled to do what it needs to do to prop up the price of oil - a commodity integral to their economy.
“Opec+ have little choice but to cut output substantially given the virus-related demand losses,” he said. “The Saudis have accounted for over half the officially agreed cuts and they will lead the way with additional cuts and the others, including Russia, will join because it is overwhelmingly in their economic interests.”