This week, the Organization of Petroleum Exporting Countries (OPEC) has been in meetings trying to reach an agreement on oil production in a bid to stabilize market price. It became necessary in the face of the coronavirus epidemic that is threatening to crush not only the oil industry but the global economy.
The OPEC meeting held in Vienna on Friday ended in disagreement as the top guns in the industry, Russia and Saudi Arabia failed to reach a consensus, plummeting the already dwindling oil market. Brent crude went down more than 9 percent, as low as $45.18 per a barrel. West Texas Intermediate crude, the U.S. benchmark fell as low as $41.11 per a barrel.
The oil producing countries were seeking to reduce production and output beyond what is already approved by the organization to curb surplus, but failed to reach an agreement.
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The existing oil output cut is 2.1 million barrels per day (bpd), but it will expire at the end of March. The new proposed cut has been lowered to 1.5 million barrels a day on a pro-rata basis that stipulates 1 million bpd cut for OPEC core members and 500, 000 bpd for non-OPEC partners.
But the producers failed to reach a deal on both signing off on an extension of the already existing agreement and agreeing on the newly proposed cut.
The meeting ended in disarray that has thrown the oil market into further downturn. Russian Energy Minister Alexander Novak told reporters on Friday that the outcome of the meeting means that members could now pump however they like at the expiration of the already existing agreement on April 1.
“We have made this decision because no consensus has been found of how all the 24 countries should simultaneously react to the current situation. So as from April 1, we are starting to work without minding the quotas or reductions which were in place earlier, but this does not mean that each country would not monitor and analyze market developments,” he said.
Russia and Saudi Arabia appeared to have had a faceoff over the proposal of 1.5 million barrels per day cut. It appears the de-facto leader of OPEC, Saudi Arabia tried to bully Russia to agree to the cut with the help of other members and it backfired. The two countries have enjoyed a cordial three year partnership, but the recent development signals an end to a relationship that has resulted in stability of oil prices for some years now.
Helima Croft, analyst at RBC Capital Markets said: “We have just witnessed the perils of backing Putin into a corner.” She also told CNBC: “It I truly a go big or go home moment for this organization. If Russia says no today, there are real questions about the viability of the OPEC+ arrangement.”
It is not certain if the Russians are going to have a change of mind and go back to the negotiation table since they have advocated more time to determine the impact of coronavirus on the oil market. But OPEC Secretary General Mohammed Barkindo said he is optimistic that Russia will keep its commitment to their alliance.
“We have no reason to doubt the continued commitment of the Russian Federation to this partnership. We have repeatedly heard from the highest level of government in the Russian Federation of the commitment of the government to this partnership in the declaration of cooperation,” he said.
The partnership deal that put production cut at 2.1 million per a barrel took effect in January 2017 after it was agreed upon by members of producing and exporting countries. Last year December, the deal was extended and the Alliance agreed to reduce oil output by about 1.7 million barrels per day.
Saudi made a voluntary cut of its own production by additional 400,000 barrels per day. The Arab country seems to be spearheading the cuts in the face of seeming Russia’s foot-dragging and little contributions.
In 2014, the Saudis got to breaking point where they couldn’t get the Russians to sign a cut deal, so they gave up. The market nosedived and prices went down below $30 per barrel. Traders are wary that 2014 could repeat itself and worsen already bad situation.
The oil market went down as COVID-19 spread around the world with serious impact on businesses: Factories were shut down, movement of people was restricted, which means fewer vehicles, and flights were canceled.
Other members of OPEC may be severely hit by the turn of events if Russia goes ahead with its plan to shun the Alliance.
Nigeria for instance, has a budget benchmark of $57bp and mostly depends on oil for revenue. It is not certain when the coronavirus epidemic will be totally contained, so the Alliance’s failure to reach an agreement will plunge many economies into recession.