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Three OPEC countries considering deeper output cuts
For several weeks NewsBase has been covering the impact of the coronavirus on oil prices and policy; the issue continues to be a major factor in the industry
COMMENTARY
WHAT:
OPEC has not been able to agree a policy on cuts to balance the fall in demand for oil
WHY:
Russia has been unable to confirm its policy
WHAT NEXT:
OPEC producers are considering joint production cuts
SAUDI Arabia and its Gulf Arab neighbours and large fellow OPEC producers the United Arab Emirates (UAE) and Kuwait are discuss- ing this week a potential joint oil production cut of 300,000 barrels per day (bpd) in response to depressed demand amid the coronavirus out- break, taking a break from the OPEC+ alliance with Russia, The Wall Street Journal reported on February 21, quoting people with knowledge of the issue.
Saudi Arabia, the UAE and Kuwait are the largest, third-largest and fourth-largest pro- ducers in the cartel respectively, and they hold together more than half of OPEC’s production capacity.
The reported discussions about a three-way joint cut would be a break from the OPEC+ pact format with Russia, on which the Saudis have been relying for oil supply and price-fixing poli- cies in the past four years.
Since the start of 2017, when OPEC and its Russia-lednon-OPECpartnersbegantheirpro- duction cuts to prop up prices and erase the glut, OPEC’s leader Saudi Arabia has always acted in concert with Russia in the formal taking of deci- sions about production policies. So far, Russia has always been on board with the cuts, although it has always announced its position at the last possible moment.
However, the coronavirus outbreak that has shattered oil demand seems to have fractured the Saudi-Russian alliance, and the partners have been at odds over how to respond to the slump in oil demand in the key oil growth market, China.
While Saudi Arabia has been pushing for deeper cuts in Q2 to cushion the blow to oil demand, Russia has been reluctant to cut deeper — it has taken its time to review an OPEC+ group’s joint technical committee (JTC) proposal and has been avoiding mak- ing a direct reply concerning its position for several weeks.
On February 20, Russian Energy Minister Alexander Novak again dodged coming up with a specific reply and reiterated that Russia had not made a decision yet and was continuing to hold discussions with its partners.
Meanwhile, Saudi Energy Minister Prince Abdulaziz bin Salman has reportedly com- pared the coronavirus impact on demand to a “house on fire,” Bloomberg reported this week, quoting anonymous sources who had heard the Saudi minister’s comments at an event closed to the press. When your house is on fire, “you can either treat it with a garden hose and risk losing thebuilding,orcallthefirebrigade,”theminister reportedly said.
In the background to these policy decisions OPEC slashed forecasts for global oil demand, as the coronavirus has hit fuel use in China, leaving the group facing a renewed glut despite its recent production cuts.
The cartel reduced projections for demand growth in the first quarter by 440,000 bpd, or about a third, in its monthly report. Oil prices sank to a one-year low last week as the infection left businesses idle and millions quarantined in the world’s biggest crude importer.
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w w w . N E W S B A S E . c o m Week 08 26•February•2020