Oil sinks to multi-year low as OPEC deal hangs in the balance
Russia's resistance to further production cuts is leading to investor scepticism
Oil prices have fallen to their lowest levels since mid-2017. investors have become increasingly sceptical that Russia will agree to the Organisation of the Petroleum Exporting Countries’ (OPEC) plan to reduce production by 1.5 million barrels per day and extend the current 2.1 million bpd cuts.
On the year to date, both Brent and West Texas Intermediate crude have fallen more than 27 per cent. This is largely due to the major impact of the Covid-19 virus on the global economy.
According to Reuters, the consortium of nations, which includes Saudi Arabia, Iran and Iraq, has failed to convince their key non-member ally. As the second-largest oil exporter in the world, Moscow’s approval is essential for an effective stabilisation of the commodity’s price.
The OPEC+ alliance has only existed since 2016 and controls more than half of the world’s oil production. However, today’s official meeting of member and allied countries has been delayed by five hours after extensive bilateral talks behind the scenes.
By mid-afternoon trading Brent crude oil futures have fallen 3.94 per cent to $48.02 per barrel, while West Texas Intermediate crude oil futures stand at $43.82 after a 4.54 per cent drop.
Russian energy minister Alexander Novak has been reticent to agree to further cuts. Indeed, before the coronavirus outbreak he hinted at actually easing the curbs that were put in place before Saudi-Aramco’s successful IPO. More recently President Vladimir Putin has spoken of Russia “gradually weaning off” oil revenues.
Such tough talk is afforded by the fact that the Russian Federation needs an oil price of around $40-$45 per barrel in order to balance its books, whereas Saudi Arabia requires prices of around $80.
Oil demand growth was already predicted to fall slightly in 2020. However, with Chinese industry in effective shutdown for more than a month and both European and North American indices plunging, forecasts have grown even more bearish.
With Goldman Sachs predicting an actual contraction in oil consumption this year, OPEC’s planned reduction could not cut the mustard even if it were agreed upon.
As he left the OPEC building in Vienna, Libya’s representative at the talks Mustafa Sanallah joked, “No white smoke yet.” A reference to the sign for indecision given by the College of Cardinals when electing a new pope.
FURTHER READING: ‘Bond King’ predicts gold surge