VIENNA, MARCH 5 – OPEC is very unified after its unusually short meeting Thursday in Vienna and will propose an additional cut of 1.5 million barrels per day (b/d) for the second quarter. But unity with its non-OPEC partners will be tested during the Friday meeting of the larger OPEC+ group as Russia remains opposed to any deeper cuts.
The strategy to forge an agreement is high stakes – there’s either a 1.5 million b/d cut or no cuts period, as the December deal expires at the end of March. No deal will send prices crashing far beyond any coronavirus demand destruction.
As the Iranian oil minister said to reporters leaving the OPEC headquarters today “there is no plan B.” The translation here is that there will be no compromise deal between those looking for a cut and no cut. It’s a take it or leave it approach.
In our view, 1.5 million b/d is probably the minimum cut necessary to stop the bleeding on prices based on current economic data but does nothing to provide lift. We think it is possible that Saudi Arabia might have additional voluntary cuts in its back pocket to surprise the market to the upside but it is still unclear at this time.
Here’s a breakdown of the deeper cut proposal, according to the OPEC press release: OPEC will supply 1 million b/d in cuts and non-OPEC 500,000 b/d in cuts for the second quarter; December agreed cuts of 1.7 million b/d that expire on March 31 will be extended through the end of 2020.
If there’s an agreement on Friday, second quarter cuts will be 3.2 million b/d with third and fourth quarter cuts totaling 1.7 million b/d. Saudi Arabia is already contributing additional voluntary cuts of 400,000 b/d that will think will at a minimum continue.
As for Russia, our view is that it will reluctantly agree to the deeper cuts on Friday though there is probably a wink acknowledgement that its compliance will be flexible. We think Russia will agree for two reasons: 1) no deal, and thus no cuts, would be the end of the OPEC-Russia cooperation; and 2) President Putin appreciates Russia’s role as one of the two global co-managers of oil markets along with Saudi Arabia and wants it to continue.
The OPEC delegates are optimistic the deal will be completed but readily admit Russia is a big open question.