As the coronavirus continues to impact oil demand, failed attempts to co-ordinate a response among the OPEC+ members have revealed a schism between Saudi Arabia and Russia, the group’s two most influential members.
With Chinese refineries processing 25 percent less oil than they were at this time last year, the coronavirus has already had a pronounced effect on demand. Although demand predictions vary wildly, they remain bearish: The International Energy Agency warned that demand for oil is likely to be 435,000 barrels per day (bpd) less in the current quarter compared to last year. Vitol Group, in contrast, has revised its demand forecast for the quarter down by 2.2 million barrels per day (Mbd), to 98.3 Mbd. Under either scenario, a quarterly decline would be the first since the height of the global financial crisis.
In response to falling demand, Saudi Arabia earlier this month proposed deepening the OPEC+ group’s existing production cuts by an additional 600,000 bpd. This idea was rejected by Russia, on the grounds that it was too early to assess the impact of the virus on the global oil market.
Two weeks later, Russia was still in no rush to announce a position on additional cuts announced by OPEC, with energy minister Alexander Novak telling reporters that there were still two weeks until the OPEC and non-OPEC meetings on March 5 and 6, adding, “We will see how the situation develops, what happens in the market, and what forecasts are by this time.” Russia’s wait-and-see approach remains in place, even after Saudi ruler King Salman made a call to Russian president Vladimir Putin in early February.
Saudi Arabia, on the other hand, believes the situation is rather more urgent. When asked about the effects of the virus last week, Saudi energy minister Prince Abdulaziz bin Salman equated it with a burning house, apparently noting that you can either treat it with a garden hose and risk losing the building, or risk projecting panic and call the fire brigade.
Breaking the OPEC+ alliance?
The differing viewpoints are likely behind Riyadh’s decision to weigh breaking its oil alliance with Russia as the coronavirus continues to temper demand. Saudi Arabia, Kuwait, and the United Arab Emirates are holding talks to discuss a possible joint output cut of their own of up to 300,000 bpd.
Analysts also hold the view that initiating further production cuts is more important for Saudi Arabia than it is for Russia. “Saudi Arabia needs the production cuts more than Russia,” Ryan Fitzmaurice, commodities strategist at Rabobank, told Bloomberg. “Russia will eventually come to the table in March and participate but Saudi Arabia will likely shoulder most of burden to get them to come on board.”
Yet despite the current difference in opinions, industry watchers expect that Russia will eventually come to the table ahead of the OPEC and non-OPEC March 5-6 meetings in Vienna. Helima Croft, head of global commodity strategy at RBC Capital Markets, speculated recently in the New York Times that Russia might be “slow-walking” on cuts before eventually making a commitment. But Russia’s decision to reject cut proposals, despite high-level pressure from Saudi Arabia, hints at Moscow becoming more influential in OPEC+.