(Bloomberg) -- OPEC expects Russia to respond in days, rather than weeks, to a production-cut proposal as the cartel confronts a price rout triggered by the collapse in petroleum demand from China, according to a delegate.
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, hurting the budgets of entire nations from Saudi Arabia to Kazakhstan.
In response to the epidemic, technical experts from the Organization of Petroleum Exporting Countries and its allies on Thursday recommended a further supply curb of 600,000 barrels a day until June, said OPEC delegates, who asked not to be named because talks were private.
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.
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. Neither Novak nor his Saudi counterpart Prince Abdulaziz bin Salman attended the meeting in Vienna on Thursday.
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 consultant Energy Aspects Ltd. in London.
OPEC+ faces a difficult balancing act. 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 Bloomberg Television interview, 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.
As the coronavirus caught the attention of the oil market, Brent crude has fallen more than 15% so far this year to trade near $55 a barrel. The price structure of futures has flipped into a state called contango, when contracts for immediate delivery trade at a discount to those for later dates. That’s a sign that the epidemic is expected to create an enduring surplus.
To further complicate OPEC+ decision making, a political standoff in Libya has reduced the African nation’s output by about 1 million barrels a day this month. Nobody knows how both events will unfold, or how long they will last.
Despite the loss of production in Libya, the market has remained focused on the impact on demand in China, which many believe is several times larger.
“OPEC has to cut,” said Gary Ross, chief investor officer of Black Gold Investors LLC. “They don’t have an option,” he added, saying that demand in China is right now probably down by 3 million to 3.5 million barrels a day below what it should be in normal times.
--With assistance from Alex Longley.
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