Russian energy minister Alexander Novak. Picture: REUTERS/MAXIM SHEMETOV
Russian energy minister Alexander Novak. Picture: REUTERS/MAXIM SHEMETOV

Cairo/London — Russia has asked for more time before committing to an oil-output cut recommended by oil cartel and allies Opec+ officials, as three days of intensive talks in Vienna failed to bridge differences between Moscow and Riyadh.

The alliance, which controls about half the world’s oil production, is facing a big test as the coronavirus outbreak in China hits demand for energy. Crude fell to one-year lows this week, hurting the budgets of entire nations from Saudi Arabia to Kazakhstan. The group has already been limiting output for three years to mitigate the pain of low prices, but Russia has shown reluctance to cut any deeper.

In response to the epidemic, technical experts from Opec+ recommended a further supply curb of 600,000 barrels per day (bpd) until June, said delegates, who asked not to be named because the talks were private. That’s on top of the 2.1-million bpd cut the group is already making, putting the total reduction on a par with the output of Kuwait.

“If Opec wants a decisive break from the current bearish sentiment, it would have to consider deeper cuts,” said Amrita Sen, chief oil analyst at consultant Energy Aspects in London.

The proposal from the group’s joint technical committee can’t take effect until it is agreed by ministers. In a potential sign of the trouble ahead, the technocrats didn’t set a date for emergency ministerial talks in February. Saudi Arabia had requested an early meeting, but throughout this week Russia has remained noncommittal.

That stance continued on Thursday as officials from Moscow requested more time for consultations at home, delegates said. Russian energy minister Alexander Novak said his country is still assessing the impact of the outbreak and hasn’t decided on an appropriate response.

This dynamic between Saudi Arabia and Russia is not new. Since the Opec+ alliance was created three years ago, the two sides have disagreed about whether to cut production, often publicly, but have ultimately found a way to compromise.

Opec+ faces a difficult balancing act. The coronavirus is still spreading rapidly and its impact on oil use is uncertain. Estimates of how much demand will be wiped out in the coming months vary widely, with Opec’s internal analysis predicting a modest impact of no more than 400,000 bpd, but outside estimates showing a much bigger hit.

“The magnitude of the demand shock we’re seeing is on par with the 2008 to 2009” financial crisis, Jeffrey Currie, global head of commodities at Goldman Sachs, said in a Bloomberg television interview. During that slump, prices fell from above $140 a barrel down into the $30s.

Since the coronavirus caught the attention of the oil market in late January, Brent crude has fallen about 15% to trade near $55 a barrel. The price structure of futures has flipped into contango, when contracts for immediate delivery trade at a discount to those for later dates. That’s a sign that the epidemic is expected to create an enduring surplus.

To further complicate Opec+ decision-making, a political standoff in Libya has reduced the African nation’s output by about 1-million bpd this month. Nobody knows how both events will unfold, or how long they will last.

With Javier Blas and Alex Longley

Bloomberg