Opec agrees large oil output cut, but only if Russia joins

Opec+ agreed on Thursday to cut output by an extra 1.5 million barrels per day in the second quarter of 2020 to support prices, but made it conditional on Russia joining in, two Opec sources said.

The oil demand outlook has been hit hard by measures to halt the spread of the coronavirus, disrupting factories, deterring people from travelling and slowing other business activity. Forecasts for crude demand growth in 2020 have been slashed as a result.

Saudi Arabia had suggested Opec and its allies, including Russia, cut up to 1.5 million barrels per day for the second quarter of 2020 while extending existing cuts of 2.1 million barrels per day, which expire this month, to the end of 2020.

But Riyadh, the biggest producer in the Organization of the Petroleum Exporting Countries, and other members of the group have yet to win Russian support for such a deal. So far, Moscow has indicated it would back an extension but not a deeper cut.

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Russia, which has co-operated on output policy since 2016 in the informal group known as Opec+, has in the past been hesitant during talks but signed up at and the last minute.

Opec sources told Reuters that Opec states expected non-Opec countries, including Russia, to contribute cuts of about 500,000 barrels per day out of the overall additional cut of 1.5 million barrels per day.

Two Opec sources said Russia was on board for the cuts, not just for an extension, although Moscow has yet to comment.

Opec sources have previously signalled that preliminary discussions with Russia about the cuts held this week in Vienna were trickier than before.

“The worst case scenario is an extension,” said an Opec source when asked what would happen if Russia refused to join a new cut when Opec, Russia and other producers meet on Friday.

The proposed OPEC cut, if approved, would be towards the top end of market expectations.

Oil prices

Brent oil prices pared gains by 12pm, trading near $51 a barrel after an initial 0.6 per cent rise on news of Opec’s plan to cut, highlighting the uncertainty about the real impact of the virus on global demand as it continues spreading.

This year’s slide in oil prices by about 20 per cent has made it tough for Opec states to balance their budgets, while Moscow has said it can cope with current prices.

If Opec+ was to decide to remove an extra 1.5 million barrels per day from the market, it would bring the group’s overall output reduction to 3.6 million barrels per day or about 3.6 per cent of global supplies.

Russian energy minister Alexander Novak returned to Moscow for consultations on Wednesday after talks in Vienna this week but he will be back in the Austrian capital on Friday for the broader Opec+ meeting.

"Opec+ have little choice but to cut output substantially given the virus related demand losses," said Gary Ross, founder of Black Gold Investors.

“The Saudis have accounted for over half the officially agreed cuts and they will lead the way with additional cuts and the others, including Russia, will join because it is overwhelmingly in their economic interests,” he said.

Ehsan Khoman from Mitsubishi UFG said that the measures by Opec combined with stimulus by governments and central banks around the world would help reassure markets. – Reuters