Picture: 123RF/PAVEL IGNATOV
Picture: 123RF/PAVEL IGNATOV

Dubai/Moscow/London — Oil cartel Opec and Russia will discuss record oil output cuts on Thursday to support prices hammered by the coronavirus crisis, but talks are complicated by internal disagreements and the reluctance of the US to join in any action.

Global fuel demand has plunged as much as 30% as measures to fight Covid-19 have grounded aircraft, reduced vehicle usage and curbed economic activity.

Benchmark Brent crude oil prices hit an 18-year low last month and are trading about $34 a barrel, half their level at the end of 2019, dealing a severe blow to budgets of oil-producing nations and the high-cost US shale oil industry.

US President Donald Trump said last week that a deal he had brokered with Opec leader Saudi Arabia and Russia could lead to cuts of 10-million to 15-million barrels per day (bpd), or 10% to 15% of global supplies, an unprecedented reduction.

But Washington has yet to show it is ready to take part.

Kremlin spokesperson Dmitry Peskov said a new deal on output cuts is “hardly possible” without others participating.

Ministers from Opec and Russia, along with other other producers and participants (Opec+), will discuss the issue in a video conference at 2pm GMT. The US was invited.

Riyadh and Moscow, who fell out when a previous pact on curbing supplies collapsed in March, have signaled that a deal on cuts would depend on the US reducing output too.

Trump has been reluctant to mandate cuts in domestic supply, so far, saying production had been falling naturally because of low prices anyway. Russia said on Wednesday that such declines would not count as a proper cut.

Moscow and Riyadh are also struggling between themselves to agree on the levels from which output should be cut with the kingdom insisting on April, the first month of a large hike in its output, while Moscow insists on the first quarter.

Not enough

“I’m not sure how Russia and Saudi Arabia would be able to iron out their differences today, it all could be stretched out,” one Russian source said, a sentiment echoed by two Opec sources.

Two Russian sources said the maximum Russian cut would be 2-million bpd or about 17% of its output. Saudi Arabia has yet to indicate how much it is prepared to cut.

Goldman Sachs and UBS both said on Thursday that the suggested cuts, however deep, would not be enough to address a huge decline in global demand and predicted that oil prices could fall back to $20 a barrel or even lower. “Ultimately, the size of the demand shock is simply too large for a co-ordinated supply cut,” Goldman said in a note.

Trump said on Wednesday that he has many options if Saudi Arabia and Russia fail to reach a deal on Thursday.

US senators have previously called on the White House to impose sanctions on Riyadh, pull out US troops from the kingdom and impose import tariffs on Saudi oil.

Thursday’s Opec+ talks will be followed by a meeting of energy ministers from the G20 on Friday.

To figure out how a cut would be shared among producers, Moscow, Riyadh and others would need to agree on what output levels to use as a baseline for calculating cuts. That issue has been muddied by a battle between Saudi Arabia and Russia for market share that erupted after an acrimonious Opec+ meeting in Vienna in March.

At that meeting, Russia refused to participate in cuts proposed by Saudi Arabia in response to the coronavirus crisis. In response, Riyadh said it would pump at maximum capacity and flooded an already oversupplied market with extra crude.

Saudi Arabia ramped up output to a record 12.3-million bpd in April, up from less than 10-million bpd in March. The kingdom’s Gulf allies, Kuwait and the United Arab Emirates, also raised production.

Russian TASS news agency has said that any cuts could last three months, starting from May. The largest one-off cut Opec has ever agreed was 2.2-million bpd in 2008.

Reuters