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OPEC and Russia fail to agree on deeper crude oil production cut

10 Mar 2020

The Organisation of the Petroleum Exporting Countries (OPEC) and Russia have failed to agree on a further cut in crude oil production in order to straighten crude oil prices. After the coronavirus outbreak curbed global oil demand growth forecast for 2020 from 1.1 mb/d (December 2019 forecast) to 0.48 mb/d in 2020, the 14 OPEC countries proposed a further cut in crude oil production of 1.5 mb/d until 30 June 2020 to the next OPEC and non-OPEC meeting. The cut would have been applied pro-rata between OPEC members (1 mb/d) and non-OPEC producing countries, such as Russia, Kazakhstan or Oman (0.5 mb/d). However, Russia, which would need only a US$42.4/bbl price to balance its state budget (compared to an US$83.6/bbl average price for Saudi Arabia to balance its budget), was reluctant to proceed to further cuts in oil production and to lose market shares to large producers not subject to production cut agreements, such as the United States. The current agreement on production cuts of 2.1 mb/d will expire on 31 March 2020, and will not be extended. Moreover, Saudi Arabia has announced that it would raise its own crude oil production.

These decisions immediately led to oil prices diving in international markets and losing more than 30% since the start of 2020. They are expected to result in global oil oversupply and in falling prices, harming US oil producers, whose crude oil has more than doubled over the past ten years thanks to unconventional resources, but who need prices over US$50/bbl to make shale oil and tight oil production profitable.

In December 2018, the so-called OPEC+ (grouping OPEC members and allied oil producers) agreed to jointly reduce crude oil production by 1.2 mb/d, effective as of January 2019 for an initial period of six months, in a bid to strengthen global oil prices. The production cuts were shared among OPEC countries (0.8 mb/d, Iran, Libya and Venezuela being exempted) and non-OPEC countries such as Russia (0.4 mb/d). In July 2019, the parties decided to extend voluntary production adjustments for an additional period of nine months, from 1 July 2019 to 31 March 2020. In February 2020, OPEC+ agreed to cut crude oil production by an additional 0.5 mb/d until their next meeting in early March 2020. This agreement led to total adjustments of 1.7 mb/d. In addition, Saudi Arabia decided to continue its additional voluntary contribution of 0.4 mb/d, leading to adjustments of more than 2.1 mb/d. Russia agreed a 0.3 mb/d quota during the first quarter of 2020, excluding gas condensate.

 

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