March 6, 2020 / 5:41 PM / a month ago

Breakingviews - OPEC Russian roulette yields circular firing squad

A flag with the Organization of the Petroleum Exporting Countries (OPEC) logo is seen during a meeting of OPEC and non-OPEC producing countries in Vienna, Austria September 22, 2017. REUTERS/Leonhard Foeger

LONDON (Reuters Breakingviews) - Prince Abdulaziz bin Salman is having a bad day at the office. Saudi Arabia’s oil minister and de facto leader of the 13-strong Organization of the Petroleum Exporting Countries tried on Thursday to bounce Russia, leading light of an expanded group called OPEC+, into supporting big output cuts to face down a coronavirus-shaped hole in 2020 crude demand. On Friday he failed. The fallout could be long-lasting.

OPEC+ has had a decent run. Since 2016 it has coordinated cuts that have meant producers representing about 40% of the 100 million barrel per day market have been producing less than they could. That has helped prices. It has also led to closer ties between Moscow and Riyadh, despite them having very different pain thresholds. Russia’s budget breaks even at $42 a barrel, compared to over $70 for Saudi. Moscow has also skimped on its agreed share of the cuts. Now Covid-19 has stretched the friendship to breaking point.

The scale of the virus-led market imbalance meant OPEC was always on a hiding to nothing. In the fourth quarter the output required from the cartel to balance global supply and demand was 28.9 million barrels per day (bpd), according to consultant Rystad Energy. In the first quarter of 2020 that has dropped to 26.3 million bpd. To make a meaningful difference, another cut of 2 million bpd was needed in the second quarter, Rystad reckoned.

As such, Riyadh’s suggestion of an additional 1.5 million bpd cut was always suboptimal. It would have left OPEC, Russia and a host of smaller producers collectively pumping 3.6 million bpd less than they could, without any certainty of prices recovering. Of the big players, Moscow is also better placed for turbulence. It is forecasting a budget surplus for 2020 and its oil companies have a partial hedge, thanks to rouble-denominated costs that can offset shrinkage in greenback-denominated revenue.

Russia and Saudi can at least console themselves that Friday’s 9% slump in Brent crude futures will mess up U.S. shale producers too. Yet the slump screws up their fiscal projections and raises serious questions about not only the future of OPEC+ but also the credibility of OPEC itself. A deal, however inadequate, would have been more agreeable than the chaos that now reigns.

Breakingviews

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