An oil rig in the Irkutsk Region, Russia.
Photo: vasily fedosenko/ReutersRussia on Wednesday opposed a Saudi plan that would ask OPEC and its allies to make drastic crude-production cuts, people familiar with the matter said, as the coronavirus outbreak further erodes demand amid a global oil glut.
Saudi Arabia, OPEC’s de facto leader, is pushing for the cartel and its allies including Russia to reduce collective output by 1.2 million barrels a day, the people said. But Russia is resisting a reduction of that amount, proposing at a meeting in Vienna that the group maintain current quotas through the second quarter, the people said.
The Organization of the Petroleum Exporting Countries and its allies are trying to reach a 23-nation consensus on oil production cuts at a gathering this week in Vienna, where coronavirus’ impact on oil demand will be a key point of discussion.
The outbreak is expected to diminish global crude demand by 2.1 million barrels a day in the first half of 2020, said Damien Courvalin, head of energy research at Goldman Sachs in a recent note. Cuts from OPEC “will help normalize oil demand and inventories later this year, [but] they can’t prevent an already started large oil inventory accumulation,” he said.
Even additional production cuts of 1 million barrels a day from the group would fall well short of the 2.1 million barrels a day of expected global demand loss in the first half of 2020 from the coronavirus, Mr. Courvalin added.
One scenario under consideration would have the entire OPEC+ group curb production by as much as 1.5 million barrels a day, the people familiar with the matter said. Despite an aggressive lobbying campaign on the part of the Saudis, Russia has for weeks resisted a deal that forced it to make production cuts of any kind.
“We are expecting a last minute agreement, but one that would entail heavy lifting from Saudi Arabia and a minor, if any, cut from the Russians,” said an OPEC delegate familiar with a Russian discussion with Saudi Arabia.
As a compromise, Saudi Arabia is considering a scenario where it would carry a large portion of the production curbs on its own, possibly with key allies Kuwait and the United Arab Emirates, the people said.
“You only get one chance to do the hard thing, which is to prevent a rout,” Bob McNally, president of Rapidan Energy Group. “The Saudis are in do-whatever-it-takes mode and the Russians are being their usual hard-nosed selves.”
Oil prices have declined more than 20% since the beginning of the year, roughly when the coronavirus outbreak began spreading in China. Saudi Arabia needs prices at least $10 higher to cover its national spending while Russian President Vladmir Putin has said his country is satisfied with the current level of about $52 a barrel.
“I believe that the Russians would resist until the last moment not to lower their output,” Iran’s oil minister Bijan Zanganeh said upon arriving in Vienna for the gathering, according to state-controlled news agency Shana.
Despite its opposition, Russia is likely to back down and accept a production cut because it is dependant on higher prices to cover its military operations abroad, Helima Croft, the chief strategist at Canadian broker RBC, said in a recent note.
Meanwhile, Saudi Arabia is worried the coronavirus epidemic could spread to big oil consuming centers in Western Europe and the U.S., further cutting into demand, according to people briefed by the kingdom. Northern Italy has emerged as a key center for the epidemic but disease has also spread to the U.S., which has 128 cases of novel coronavirus, according to figures from Johns Hopkins University.
“The biggest risk going forward is the Atlantic basin,” said Roger Diwan, vice president of financial services at U.S. consulting firm IHS Markit.
—David Hodari in London contributed to this article.
Write to Summer Said at summer.said@wsj.com and Benoit Faucon at benoit.faucon@wsj.com
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March 05, 2020 at 01:01AM
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Russia Opposes Saudi Plan for Drastic Oil Cuts - Wall Street Journal
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