It's Crunch Time in Vienna

It’s Crunch Time in Vienna

by | published March 6th, 2020

So much for any idea of sleep over the past 24-odd hours.

The crisis unfolding at the OPEC meeting in Vienna obliges that I continue the discussion from the last Oil and Energy Investor. I will be providing commentary on the situation later today for CGTN, the Chinese Global Television Network, in a global feed that also airs live to Beijing.

But I want to apprise you first.

On Wednesday, I provided the reasons why Russia would have no other genuine choice but to agree with a crude oil production cut coming from OPEC.

Yesterday, in the first of two daily sessions at its Secretariat, a unanimous OPEC threw down a gauntlet to Moscow – two gauntlets, actually…

Russia and OPEC Are Awkward Bedfellows at the Moment

First, the organization surprised most analysts – including myself – by unanimously recommending a 1.5 million barrel a day production cut from OPEC+ (That’s OPEC plus non-organizational producers, the most important of which is Russia).

Now, that’s far more than the 1 million barrel cut I had anticipated, or the 600,000 initially reported out by OPEC’s technical committee last month. This reduction is on top of the 2.1 million barrel a day cut that would have expired this month.

The total cut adds up to some 3.6 million barrels, a very significant total.

OPEC agreed to provide 1 million barrels with the remaining 500,000 to come from Russia and other outside oil producers. The United States, now the largest global producer, does not participate in OPEC+ and is not bound by any decision made by ant OPEC+ members.

Second – and this is the real challenge – yesterday’s decision contained an ultimatum: Should Moscow not agree to cooperate, OPEC would cancel any cuts from its side.

In the current COVID-19 (coronavirus)-fueled market malaise, a failure in further OPEC+ cuts would result in crude prices collapsing across the board.

Nonetheless, shortly after arriving in the Austrian capital, Russian Energy Minister Alexander Novak confounded the analysis by stating Moscow would not agree to the new cuts but is in favor of extending the existing ones.

Oil prices immediately stormed south with Brent – the widely used global benchmark set daily in London – collapsed almost 6 percent before finding a temporary floor. This has all the earmarks of a rout. Both Brent and WTI (West Texas Intermediate, the standard used for futures contract written in New York) are at three-year lows.

This is now a very fluid situation. In a very rare move this morning, OPEC representatives, after holding what amounted to an informal meeting at the hotel housing the Saudi delegation, demanded that the full 3.6 million barrels a day in cuts now be extended through the end of 2020.

This amounted to a further rejection of the Russian position, as my sources at both the International Energy Agency (IEA) in Paris and OPEC’s Riyadh-based research arm, the International Energy Forum (IEF) point out.

They note there is no COVID-19 demand impact projection extending that far into the future. This latest OPEC move to increase the tension vis-à-vis with Russia is all about brinksmanship.

We’ll See Who Blinks First

For its part, Moscow has never agreed to any continuation of the current 2.1 million barrels beyond the end of this month and would not appear to countenance an even larger decline for the entire year.

Some sector contacts are calling this a classic posturing between Russia and the Saudis. Both nations had been hailing their ability to work together in international moves to stabilize oil prices. That is today coming under direct fire.

Here is the consensus my network, at least as of this morning. Preliminary indications are that COVID-19 has been largely responsible for a 2.7 million barrel a day decline in worldwide demand, most of that centered in China. But the forward estimates are not certain.

That is because the longevity of this particular outbreak is unknown at this time. The spread of other similar viruses has abated once the weather warms. That would lead to a rapid recovery in oil prices.

The Saudis need an improvement in price to bolster the market values of its floated Aramco shares. Those remain essentially based upon the value of Aramco oil in the ground. Other OPEC members need a rise in price to avoid protracted central budget implosions and rising debt. In the case of Venezuela, on paper at least still holding OPEC’s largest oil reserves, the current pricing (augmented by the discount Caracas must provide to the market) is enough to push the country into a full-blown civil war.

Meanwhile, for all the reasons discussed on Wednesday, Russia cannot sustain another major decline in oil prices.

That would seem to augur a compromise is in the air. Yet doing what all sides know is n their best interests is not always easy in the arena of national egos.

One last element is this rapidly moving scenario. I have been receiving anecdotal information indicating rises in Russian oil production and shipments to main export storage terminals, especially on Rotterdam.

Major Russian oil companies are known to be dragging their feet on extending cuts, claiming that they have been adversely affecting bottom lines. The production-to-storage flow may signal a longer fight is in store. The key here will be the extent to which an already under fire Russian central budget can provide “off the books” support to the government-controlled oil operators.

The OPEC+ impasse needs to be resolved or the oil pricing picture will further deteriorate, extending losses beyond the participants to US producers.

But in the world of geopolitics, what is necessary is not always what is done.



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