Page 10 - FSUOGM Week 06 2020

FSUOGM POLICY FSUOGM
Russia resists OPEC calls for cuts
RUSSIA
KEY FACTS:
• Russia is reluctant
to commit to deepen cuts in response to the coronavirus outbreak.
• Russian producers are against the move and Russia can endure low oil prices better than Saudi Arabia.
• Moscow’s course of action will depend on how severe the outbreak’s impact on oil markets proves
to be.
RUSSIA continues to resist calls from OPEC to deepen oil production cuts in response to the coronavirus outbreak.
Russia, Saudi Arabia and other members of the so-called OPEC+ alliance have helped prop up oil prices over the last three years by agree- ing supply restrictions. However, Moscow and Riyadh are now at odds over how to respond to the coronavirus epidemic, which has crippled the Chinese economy, causing its oil demand to slump.
Last week a panel advising OPEC+ suggested provisionally reducing the group’s output by 600,000 barrels per day (bpd) in order to support prices. However, Russian Energy Minister Alex- ander Novak said on February 7 that Moscow needed more time to assess the situation.
OPEC+ members are due to convene to dis- cuss policy in early March, but Saudi Arabia is understood to be pushing for an emergency meeting this month – something that Russia is against.
Moscow has been reluctant to commit to increased reductions in output over the years. And what quotas it has agreed to have been largely disregarded. Russian production soared to a post-Soviet high last year of 11.25mn bpd in 2019, despite its promise to keep below 11.2mn bpd.
Russia’s more relaxed response to the crisis can be explained by the fact it is more resistant to low oil prices than Saudi Arabia. Fitch Ratings estimates the country’s fiscal break-even oil price at $50 per barrel, versus $80 for the kingdom.
Moscow is also reluctant to deepen cuts because of growing antipathy towards co-opera- tion with Riyadh among its oil producers, which have delayed a raft of new projects because of the output restrictions. One of the most vocal critics of OPEC+ is Rosneft CEO Igor Sechin, who had
a one-to-one meeting with President Vladimir Putin on February 11, according to the Kremlin. Russia’s largest oil producer extracted 285.5mn tonnes of oil equivalent of hydro- carbons in 2019 (5.8mn bpd according to the tonne-to-barrel ratio Rosneft uses), which is roughly the same volume as was produced in 2018, Sechin told Putin. He noted that OPEC+ cuts had restrained the company’s
production.
Despite Sechin’s opposition, both Putin and
Novak continue to support Russia’s participation in OPEC+, making it unlikely that Moscow will pull out of the deal anytime soon, especially after it secured a key concession last year. OPEC+ members agreed in late December to let Russia exclude condensate production from its cuts quotas, which should enable it to bring some supply back on stream.
While Russia is keen to remain part of the alliance, this does not mean it is willing to rein in production further, which Sechin and other industry heads argue would simply offer up market share to US shale producers. Ultimately though, the court of section it takes will depend on how serious the impact of the coronavirus outbreak proves to be.
China is yet to publish statistics for oil demand this year. But FGE estimates that Chi- nese oil demand is currently down 3.2mn bpd as a result of the coronavirus outbreak. The energy consultant forecasts consumption to be 2.5mn bpd lower in February as a whole, assuming that less affected areas return to work.
Oil prices sank to their lowest level since Jan- uary last year on February 10, amid reports of weaker Chinese demand and Russia’s opposition to cuts. Brent was down 2% at $53.39 per barrel, and US West Texas Intermediate (WTI) down 1.4% at $49.52 per barrel. ™
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Week 06 12•February•2020