(Bloomberg) --
OPEC agreed to cut oil production by 1.5 million barrels a day to offset the huge demand hit from the coronavirus epidemic, but it was unclear whether its key ally Russia was on board.
Ministers from the Organization of Petroleum Exporting Countries reached an agreement at talks in Vienna on Thursday, delegates said, but Russian Energy Minister Alexander Novak wasn’t present at the conference. On Wednesday, he left the city without giving his support to the production cut favored by Saudi Arabia, instead preferring to maintain current output levels.
The 1.5 million barrel-a-day cut would include Russia and other non-OPEC allies, delegates said, asking not to be named because the talks were private. Those countries will arrive in the Austrian capital on Friday to discuss an agreement. If Moscow continues to withhold its backing, it’s unclear whether the cut would actually be implemented.
With oil prices down more than 20% since the beginning of the year, the debate in Vienna between OPEC and its allies was being closely watched across the energy industry. The fortunes of resource-dependent economies from Africa to Asia, as well as corporate giants like Exxon Mobil Corp (NYSE:XOM). and shale drillers in Texas, could turn on the cartel’s decision.
Saudi Arabia’s push for a big cut reflects that mounting concern. Oil just suffered its biggest weekly slump since the global financial crisis, falling far too low to balance the budgets of most OPEC members.
“We think OPEC+ really needs to cut about 1 million to 1.5 million barrels a day just to put a floor under prices right now,” Allyson Cutright, a director at Rapidan Energy Advisers, said in a Bloomberg Television interview. Ultimately, the Russians will go along with that, but the Saudis “will have to take the majority” of cuts.
The division of cuts between Saudi Arabia and Russia has always been uneven, with the former bearing a larger share from the very start despite the latter having higher production. But the split has become more inequitable with each iteration of the deal. Last year, the kingdom implemented 65% of the group’s total supply reduction on average, compared with just 11% for Russia, according to data compiled by Bloomberg.
The Kremlin has gained a lot from its cooperation with OPEC. The country has been the biggest financial beneficiary of the cuts, largely because it’s borne a lesser share than Saudi Arabia. The alliance has also significantly enhanced President Vladimir Putin’s presence on the world stage and his political clout in the Middle East.
Still, pressure on the alliance is greater than ever and its two dominant nations aren’t necessarily aligned, with Russia only requiring a price of about $40 a barrel to balance its budget.
The coalition is already making deep cuts to offset the U.S. shale boom, agreeing on a fresh supply reduction of 2.1 million barrels a day as recently as December. OPEC’s output last month was the lowest since 2009, when the group implemented the sharpest production cuts in its history at the depths of the global financial crisis.
As OPEC+ debated, U.S. oil production surged last week to a fresh record, and net American petroleum exports increased to a record of nearly 1 million barrels a day on a four-week average.
The JMMC, which oversees the accord between OPEC and it allies, didn’t choose between the Russian and Saudi proposals, said a delegate, who asked not to be named because the talks were private. Moscow is likely to wait until the last moment to make any decision on whether to back deeper cuts, Iranian Oil Minister Bijan Namdar Zanganeh told reporters on Wednesday.
As well as seeking to forge a deal, members of OPEC+ are also grappling with the risks of bringing together delegations from 23 nations as the disease continues to spread. Medical advisers screened staff and delegates to check for high temperatures and some employees were told to work from home. OPEC told national delegations to limit their size to the “bare minimum” and blocked the press from entering its secretariat.