OPEC+ weathers shock of market glut amid fears of new Saudi-Russian row

Signs of a split between Saudi Arabia and Russia on the length of the period of cuts might bring the crisis back to square one.
Tuesday 02/06/2020
A technician working at Rumaila oilfield in Basra, Iraq. (Reuters )
A technician working at Rumaila oilfield in Basra, Iraq. (Reuters )

LONDON - OPEC+ is striving to get out of the crisis of an oil market glut, free-falling prices and slow demand by closing ranks and sticking together to stay on course in its strategy of production cuts agreed to last month, which has so far managed to absorb the shock of the crisis. But signs of a split between Saudi Arabia and Russia on the length of the period of cuts might bring the crisis back to square one.

OPEC+ sources said on Monday that OPEC and Russia are close to a compromise over the extension of oil production cuts currently in place, and that they are considering a proposal to extend supply cuts for a month or two.

Last April, OPEC+ decided to cut production by an unprecedented volume of 9.7 million barrels per day, close to 10% of the global production, in an effort to bring falling oil prices up again after having been swept by low demand stemming from the fight against the global COVID-19 pandemic.

Instead of gradually removing production cuts in July, Reuters sources last week said that Saudi Arabia, the largest OPEC producer, was leading talks on maintaining the level of the current cuts until the end of the year, but it has not yet won Russia's support. The latter is in favour of a gradual lifting the restrictions.

This optimism will be fragile if OPEC+ does not succeed in avoiding the division that could occur between those who want to cancel oil production cuts in July, and those who may want to extend the cuts.

“It is the current proposal, but it is not final yet,” an OPEC + source said of the one or two-month extension. A Russian oil source said existing cuts would be extended “for a month or two, and not for half a year," but there is no agreement on the Russian proposal.

The OPEC + group is likely to hold an online meeting Thursday to discuss production policy after Algeria, the current OPEC chair, proposed to push up the date of a meeting that had been scheduled for the ninth and tenth of June.

The OPEC + production cut, along with unprecedented cuts by non-member countries such as the United States and Canada, helped raise oil prices up to $35 a barrel, but this price is just half of what it was at the beginning of the year.

The group of oil producing countries needs to ensure that there is no rift between Saudi Arabia and Russia, which lead the group, as there was last time when they were unable to agree on implementing the agreement.

So far, cooperation between member states has been solid and the rate of compliance by most of the 20 signatories has been high.

Economic observers believe things are going in the right direction for the cartel, but there are still questions over how producers should respond to this crisis.

The office of Russian Energy Minister Alexander Novak believes that all production cuts, along with the comeback of Chinese oil demand, will restore the global balance between supply and demand in June or July.

But followers believe that Russia will not gamble alone in breaching the cuts agreement. Moscow has discovered how much it can lose if it is too rigid in its approach, as it was with Saudi Arabia, which led to a significant fall in oil prices.

Oil strategist Julian Lee notes that it is still not the right time for producers to relax, as demand has not yet recovered in the United States, Europe, nor many Asian countries other than China.

India's fuel consumption is almost at 40% of what it was last year, while demand in the US made a sudden drop, according to data from last week, which means that it is still at nearly 25% of what it was last year.

Lee told Bloomberg that producers should keep all of this in mind as they prepare to meet again to assess the effectiveness of the production cut deal and confirm their next steps, warning that they need to be careful, and that they may give in to the temptation of increasing production. The signs of a slight recovery of oil prices should be taken as a license to fully reopen the production valves, especially when there are unstructured efforts to boost production by some group members.

Saudi Arabia and its neighbours decided last month to make further cuts in production in June. This could mean a further reduction of 1.2 million barrels per day, which means that Saudi oil production will reach 7.5 million barrels per day next month, a level that the kingdom has not seen in 20 years, except in the wake of direct attacks on Saudi oil processing plants last year.