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OPEC and its 14 members have agreed to slash production by 1.5 million barrels per day (bpd) through the second quarter of the year to support sagging oil prices. This decision made Thursday was taken ahead of critical talks on Friday with the 10 other oil-producing nations led by Russia that still has to agree to the plan, it’s opposed in the past..
The surprisingly large proposed cuts, which were at the top end of analyst expectations, are believed to be conditional on Russia’s approval. Russia continues to balk at production cuts by OPEC+ while U.S. shale oil firms continue to flood the market with oil. The shale oil boom, mainly as a result of fracking has made the U.S. the world’s largest oil producer and stripped away OPEC’s once-dominant position to influence oil prices.
Russia is still expected to come aboard and support the newest plan by OPEC+ to slash production by at least one million bpd as the world’s appetite for oil continues to wane on account of the raging global spread of COVID-19.
OPEC+, which consists of 14 OPEC member nations plus 10 allied oil producing countries such as Russia is expected to approve the cuts Friday during the cartel’s ongoing meeting in Vienna, Austria.
Analysts are saying Saudi Arabia, the cartel’s largest producer, wants even larger production cuts to support a weakening market groaning under demand destruction, especially in China, the world’s largest oil importer. Support for cuts in excess of one million bpd isn’t universal, however. United Arab Emirates’ Minister of Energy and Industry Suhail al-Mazrouei refused to speculate when asked if OPEC+ will look to impose an additional cut of more than one million bpd.
On the other hand, Iranian Oil Minister Bijan Zanganeh claims OPEC will “find a way” to help balance the market. Zanganeh didn’t comment when asked specifically about the extent of further production cuts.
Cash-strapped Russia, however, has maintained its distaste for any large production cuts that will imperil its oil revenues. Its opposition to substantial cuts is apparent despite oil prices plunging more than 25% since late January.
International benchmark Brent crude traded at $51.25 Thursday morning, up some 0.25%. On the other hand, U.S. West Texas Intermediate (WTI) stood at $46.92, or 0.3% higher.
Analysts are warning of a crippling selloff unless OPEC agrees to a large production cut.
“Our base case (scenario) is that they will be able to put together a cut of probably a million barrels per day,” said Amrita Sen, co-founder and chief oil analyst of Energy Aspects. “But Russia’s always going to be difficult, and that’s what we’re seeing right now.”
Sen said she’s “100%” certain markets will sell-off if a smaller output cut than expected is announced.
“We’ve already seen Brent test $50 (per barrel) last week and I think people are expecting an OPEC action. I would say a million (bpd cut) is probably priced-in right now. Anything less, or even around that, will sell-off,” she said.
“If they fail to deliver, I think we’ll test tthirties (oil at $30 a barrel).”
Sen argues OPEC+ is focused on “doing something very dramatic right now” since the cartel can always reverse the cuts in the second half of the year.
