Saudi Arabia presses for coronavirus oil output cuts, but Russia still says no

Saudi Arabia and Russia remain far apart on how much crude production to rein in, despite a lengthy bilateral meeting and four hours of discussions on the coronavirus outbreak in a key ministerial advisory committee in Vienna Wednesday.

Saudi energy minister Prince Abdulaziz bin Salman pressed his case for the OPEC+ coalition to nearly double its output cuts, while Russian counterpart Alexander Novak said the group should merely stand pat on its current 1.7 million b/d cut accord through the end of the second quarter, according to people familiar with the talks.

Novak left the committee meeting at the OPEC secretariat before it ended without addressing reporters to fly back to Moscow for further consultations with Russian President Vladimir Putin, said the sources, who asked not to be identified because of the sensitivity of the negotiations. Russia is seen as far more resilient to lower oil prices and has steadfastly refused to commit to any further restrictions on its production, despite intense lobbying by Saudi Arabia over the past month.

With some analysts forecasting the first contraction in global oil consumption this year since the financial crisis in 2008 due to the coronavirus outbreak, OPEC+ members have been under pressure to shore up slumping prices by drastically slashing their crude output.

Ministers and delegates have floated proposals for deeper cuts ranging from 500,000 b/d to 1.5 million b/d, with the latter figure said to be favored by Saudi Arabia to demonstrate the coalition's resolve in preventing a supply glut. It is what the advisory committee, composed of nine OPEC+ ministers, including Prince Abdulaziz and Novak, recommended through the end of June – but without Russia's endorsement, one source said.

Crude prices surged in mid-afternoon European trading on reports of the Saudi proposition – only to plunge as news of the Russian recalcitrance emerged.

"It's going to be a deal between Saudi Arabia and Russia, and we are just waiting and watching," one delegate said.

Prince Abdulaziz's only comment to reporters after the committee meeting was a joke that he was trying to keep the oil market in suspense.

The standoff sets up two more days of likely tense talks in the Austrian capital. OPEC ministers will gather Thursday to discuss their end of any deal, and Russia and the other nine non-OPEC will join the negotiations Friday.

SENDING A MESSAGE

Beyond convincing Russia, there were other signs of disunity among OPEC members.

The head of Libya's National Oil Corp. dismissed any need for OPEC+ to deepen the cuts, saying that the bloc has already lost more than 1 million b/d of his country's production due to a port blockade by opposition forces.

Mustafa Sanalla, arriving in Vienna ahead of the OPEC talks, said the discussed cuts were "not logical" and that the 1 million b/d loss is "enough."

Sanalla's comments were curious given that Libya has an exemption from any OPEC production quota, but observers said he was likely making a pointed statement to Saudi Arabia and the UAE, who back the self-styled Libyan National Army in its battle against the UN-backed government. The LNA has not allowed Libyan crude to be exported since mid-January, causing production to plummet to around 120,000 b/d.

Sanalla "is under significant pressure to resume production," said Iliase Sdiqui, an associate director with Whispering Bell, a risk management company covering Libya. "He has been trying so hard to get everyone to condemn the [port] closures, but hasn't been able to."

Iranian oil minister Bijan Zanganeh told reporters that he sees a need for at least 500,000 b/d in additional cuts, but suggested that the negotiations this week will be guided more by politics than market fundamentals.

"Expertise [doesn't] work here. Politics does," he said.

OPEC's previous meeting in December saw Angola and Iraq dig in their heels against deeper cuts, with Angola ultimately being allowed to maintain its quota.

Yousef al-Shammari, who heads the oil market consultancy CMarkits, said he believes the coalition will eventually coalesce around a deal, given the magnitude of the market's selloff. Crude prices have declined some 25% since early January.

But any agreement will likely rest on how much of the burden Saudi Arabia will be willing to shoulder.

"How they are going to solve it with Russia is still unclear to me, but all indicators show a potential cut," he said.

Investment bank Goldman Sachs on Thursday forecast that global oil demand would contract 150,000 b/d this year, while consultancy Facts Global Energy projected a 220,000 b/d decline, as the coronavirus epidemic has spread to 72 countries outside of China.

OPEC+, an alliance forged in late 2016, has been in this position before, with Russia holding out until the very end before committing to a deal.

Saudi Arabia will be hoping that a day of reflection will sufficiently move Russia to be a team player.