Opec goes back into crunch talks as Russia resists big oil cut
OPEC prepared for a further day of talks on oil-production curbs after a summit on Thursday ended with no deal, as Russia resisted the big output cut that Saudi Arabia was demanding.
After a six-hour meeting in Vienna, Saudi Energy Minister Khalid Al-Falih said he wasn’t confident of an agreement when the Organisation of Petroleum Exporting Countries met its allies yesterday. A proposal for a combined Opec and non-Opec cut of one million barrels a day was left dangling in uncertainty.
“Not everybody is ready to cut equally,” Al-Falih told reporters in Vienna. “Russia is not ready for a substantial cut.” Another sticking point in the talks was Iran’s contribution, a delegate said. The Persian Gulf nation is currently subject to US sanctions and as such won’t participate in any curbs, Oil Minister Bijan Zanganeh said.
Other members said it should participate, according to a delegate.
The failure to secure a deal so far is the latest example of how Opec is under pressure from forces that are re-drawing the global oil map, leaving it increasingly dependent on the support of non-member Russia. In a striking development, the US government revealed that it turned into a net exporter of petroleum for the first time in 75 years last week thanks to the shale boom.
The oil market reacted negatively to Opec’s setback, with Brent crude sliding 2.4% to US$60.06 a barrel in London on Thursday. Prices extended declines yesterday.
Russia, which initially sought a 100,000 to 150,000-barrel-a-day reduction as part of a new deal, may agree to a slightly larger cut depending on Opec’s decision on its own output, a delegate said. Moscow insists its cut should be gradual and reconsidered after the first quarter since the market may shift, the delegate said, asking not to be identified discussing private deliberations.
Oil’s duopoly
Much has changed for Opec since 2016, when Russia and Saudi Arabia ended their historic animosity and started to manage the market together. The alliance has transformed the cartel into a duopoly in which the Kremlin is asserting its power.
As ministers sat down at Opec headquarters on Thursday, Russian Energy Minister Alexander Novak flew to St. Petersburg to meet President Vladimir Putin to decide on their country’s contribution. If the group’s most important partner in the so-called Opec+ alliance decides to make a sizable cut, the cartel would follow up.
“The impression that the group can’t really come to a decision without first checking with Moscow is going to be difficult for some members to swallow,” said Derek Brower, a director at consultant RS Energy Group. “The market won’t care if tomorrow they manage a sizable cut with proper metrics, but that’s still a big if.”
Elusive agreement
Earlier Thursday, ministers were discussing a proposal to curb combined Opec and non-Opec output by about one million barrels a day, a delegate said. That was in line with the Saudi minister’s preference for a moderate reduction that wouldn’t “shock the market.” The kingdom is under economic pressure after a collapse in oil prices last month, yet it’s seeking to walk a fine line between preventing a surplus next year and appeasing President Donald Trump.
While Middle Eastern producers need high oil revenues to pay for government spending, sensitivities are different in Russia, which is running a budget surplus and benefits from a weak ruble that mitigates the effect of lower crude prices in dollars. The government is concerned about the impact of higher prices on consumers, stoking discontent with economic policy, according to one Kremlin official.
Russia’s contribution
The size of Russia’s contribution to any OPec+ curbs has remained undefined through this week’s talks in Vienna.
In private conversations earlier in the week, delegates said that Saudi Arabia had favoured a Russian cut of about 300,000 barrels a day.
Opec ministers were also discussing whether to exempt Libya and Venezuela from making cuts, another delegate said. Those countries, along with Nigeria, were opposed to participating in a supply reduction, the delegate said.
Before Thursday’s meeting, Al-Falih said that “if everybody is not willing to join and contribute equally, we will wait until they are” and he was prepared for the consequences of no deal.
“Some countries will struggle because their economies are very constrained” and Nigeria itself could only manage a small cut, Minister of State for Petroleum Resources Emmanuel Kachikwu said in a Bloomberg television interview before the meeting.
Beyond its internal disputes, Opec is also contending with vociferous opposition from the US president, who’s taken to using his Twitter account to berate the group’s policies and sees low oil prices as key to sustaining America’s economic growth.
While ministers met on Wednesday, Trump tweeted that the “world does not want to see, or need, higher oil prices!”
Thursday’s inconclusive talks could end up giving the president what he wants.
Opec will first reconvene yesterday without outside partners in Vienna, then in the afternoon the group meets with its non-Opec allies, including Russia, a delegate said.
“The risk of Opec+ not being able to agree on a deal was always very high and this will now pressurise prices significantly lower,” said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd.
“There is no anchor for the market.” — Bloomberg