VIENNA, March 5 — Opec agreed today to cut oil output by an extra 1.5 million barrels per day (bpd) in the second quarter of 2020 to support prices that have been hit by the coronavirus outbreak, but made its action conditional on Russia and others joining in.
The oil demand outlook has been pummelled by governments’ steps to halt the spread of the virus, prompting Opec to consider its deepest cut since the 2008 financial crisis.
Demand growth forecasts in 2020 have been slashed as factories have been disrupted, people have been deterred from travelling and other business activity has slowed.
Saudi Arabia has been pushing Opec and its allies, including Russia, for a big cut up to 1.5 million bpd for the second quarter of 2020 while extending existing cuts of 2.1 million bpd, which expire this month, to the end of 2020.
But Riyadh, the biggest producer in the Organization of the Petroleum Exporting Countries, and other Opec members have struggled to persuade Russia to support the move. Moscow has till now indicated it would back an extension but not a new cut.
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 the last minute.
Ministers from Opec+ meet tomorrow in Vienna.
The coronavirus outbreak created an “unprecedented situation” with risks “skewed to the downside” and demanding action, Opec said in a statement after its ministers met.
It said ministers agreed to an extra supply cut of 1.5 million bpd until June, out of which non-Opec states were expected to contribute 500,000 bpd. The group said this was in addition to extending existing supply curbs to the end of 2020.
Opec said it would hold another ministerial meeting on June 9.
‘Worst case scenario’
Opec sources have previously signalled that preliminary discussions with Russia about the cuts held this week in the Austrian capital had been 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 tomorrow.
The proposed Opec cut, if approved, would be towards the top end of market expectations. If Opec+ was to decide to remove an extra 1.5 million bpd from the market, it would bring the group’s overall output reduction to 3.6 million bpd or about 3.6 per cent of global supplies.
The last time Opec reduced supplies on such a scale was in 2008 when it cut production by a total of 4.2 million bpd to address slower demand because of the global financial crisis.
Brent oil prices pared gains by 1300 GMT, trading near US$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.
Russian Energy Minister Alexander Novak returned to Moscow for consultations yesterday after this week’s talks in Vienna and will be back in the Austrian capital tomorrow 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