Moscow favors letting cheap prices stir demand
Crude prices logged their worst day since the financial crisis after two of the world’s biggest oil producers failed to agree on whether to reduce global supply in the face of the coronavirus’s devastating effect on demand.
On Friday, Brent crude, the global benchmark, notched its largest one-day percentage decline since December of 2008, falling 9.4% to $45.27. U.S. crude futures declined 10.1% to $41.28 a barrel, their largest one-day percentage decline since November of 2014.
“It’s a disaster,” said Robert Yawger, director of the futures division at Mizuho Securities U.S.A.hat happened was really a worst-case scenario situation.”
Saudi Arabia was unable to persuade Russia to join its plan for deeper crude production cuts at a gathering of the Organization of the Petroleum Exporting Countries and its allies in Vienna. The failure signaled the end of a four-year collaboration between OPEC’s member-nations and 10 nonmembers led by Russia, which collectively was known as OPEC+.
“Today will be a regretful day,” Saudi energy minister Abdulaziz bin Salman told the gathering, according to people who were present, after Russian delegates insisted they wouldn’t debate further action before the group’s next scheduled meeting in June.
The splintering of OPEC+ exposes stark differences in the importance of oil in Russia and Saudi Arabia. Russia’s economy is more diversified and it doesn’t suffer as much as the Saudi kingdom when oil prices hover around $50 a barrel.
In addition, Moscow’s oil sales to China haven't suffered as much those of other producers. The Asian giant has continued to buy large quantities of Russia’s cheaper product for storage.
Unlike Saudi Arabia, Moscow favors not cutting supply and allowing cheap prices to stir demand, which could be compared to the economic path taken by the Chinese government in recent weeks, OPEC delegates said. “They are saying a deeper cut is not the answer, and we are being too reactive,” said an OPEC delegate.
OPEC’s failure to secure a deal with Russia highlights not only philosophical differences over how to address the demand decline, but also the breakdown of crucial personal relationships between the Saudi and Russian delegations.
From the start of the collaboration in 2016, former Saudi Energy Minister Khalid al-Falih often negotiated oil-production pacts with his Russian counterpart, Alexander Novak, ahead of OPEC+ meetings. The tete-atetes ensured that meetings went relatively smoothly, according to OPEC delegates.
The connection afforded Russia an enormous amount of clout in international energy and political circles. The country stood on equal footing with Saudi Arabia and often had veto power over the cartel’s decisions. Friday’s fallout puts into question the influence Saudi allowed Russia within the OPEC+, said Helima Croft, the commodities chief strategist at Canadian broker RBC.
That interplay changed when Mr. Falih was replaced by Prince Abdulaziz Bin Salman last September.
In reaction to the market turbulence, the new Saudi minister was pressed to secure a broad agreement on hefty output cuts by his brother, Crown Prince Mohammed bin Salman, according to a Saudi oil adviser. And at the Vienna meeting, Prince Abdulaziz assumed Mr. Novak would eventually go along with the plan, the adviser added.
Some OPEC delegates blamed the failure on a hasty meeting called by Prince Abdulaziz in Vienna late
Russia wouldn’t agree to a Saudi plan to deepen production cuts at fields like this one in Almetyevsk to prop up crumbling crude prices. ANDREY RUDAKOV/BLOOMBERG NEWS
Thursday. There, he convinced fellow OPEC ministers to recommend production cuts through the end of the year, rather than the previously agreed three-month period, according to a person present. He told the room it was a “lot easier to relax cuts” than to negotiate an extension in June, the person added.
The OPEC’s ministers agreed to production cuts of 1 million barrels a day through the end of this year, to be shared among its 13 member nations. The proposal also called for another 500,000 barrels of daily cuts to be divided among the cartel’s 10 Russia-led oil-producing allies. Russia, the de facto leader of the additional countries that make up OPEC+, was still pushing to roll over existing cuts without any additional reductions and wait until June before considering any cuts beyond those agreed at the last alliance summit in December, according to several OPEC delegates.
The Saudi prince thought the Russians were bluffing when they balked at the output cuts they would be expected to make and thought they would ultimately agree to the reductions, an OPEC delegate said.
“That was his gamble and he did not win,” the delegate said
As a person who goes to see one annually to make sure my cow valve is still working, I agree. But if it stops while I'm not at his office, I'll figure it quickly I bet.
