VIENNA, AUSTRIA MARCH 7 – Oil prices are set to test new lows as OPEC and it’s non-OPEC partner Russia were not able to reach an agreement on further production cuts to offset declines in demand from coronavirus.
On Thursday OPEC agreed to cut production through the rest of 2020 by an additional 1 million barrels per day (b/d) if Russia and its other non-OPEC partners agreed to cut 500,000 b/d. OPEC knew Russia opposed the deal so it decided to propose “a take it or leave it” arrangement when they met the next day. On Friday after a marathon negotiating session between the two oil ministers, Russia decided to “leave it.”
As a result, all OPEC+ production cuts will expire at midnight on March 31 and it will be up to each member to set production volumes. Prices are sure to decline further as there is no sign in sight of an event that will establish a floor.
Conversations in Vienna among OPEC delegates was like a session of “in the kitchen with OPEC” with Russia warning other members not to “catch a falling knife” on oil prices, and Saudi Arabia suggesting that maybe Russia needs “to touch a hot stove” one more time to realize the wisdom of their OPEC production cut plan.
Despite the reasons cited publicly, Russia’s main motivation was to target US shale production. Saudi Arabia and others tried to explain that route was tried before and largely ineffective.
OPEC Secretary General Barkindo tried to put an optimistic spin on events saying that “all of OPEC and 90 percent of non-OPEC” were committed to cuts and that the “conference had adjourned for members to have consultations with their leadership at home.”
While its possible there could be further talks between now and March 31, we think it’s unlikely to have a different result. It’s hard to imagine that the leadership in both countries approved the “don’t blink” positions taken in Vienna this week. The failure to reach a deal in Vienna marks the end of the OPEC-Russia cooperation.
Russia believes its economy is insulated by further price declines but that remains to be seen as the Russia stock market was down 5 percent on Friday. More importantly, this could mark the end of Saudi, UAE and other Gulf investment in Russia. Delegates were genuinely surprised by Russia’s “stubborn” opposition to cuts, and based on comments made after the meeting, there is significant bad blood now.
President Trump may like lower prices in the short term until the Administration realizes the economic blow this will be in the job-creating energy sector in an election year. In addition, one could argue that, based on raw energy interests displayed here alone, Russia would certainly favor either Bernie Sanders ban fracking or Joe Biden’s stricter regulations schemes on the US energy sector rather than Trump's energy dominance policy.
Lastly, we also believe that events in Vienna this week are a sign that Saudi Arabia has decided it had enough of the press articles touting Russia as the de facto leader of OPEC+. The “my way or the highway” cut proposal given to Russia is a clear indication that Saudi energy minister Prince Abdulaziz, a son of King Salman, is not keen on Russian gamesmanship when its compliance under the agreement was lacking.
