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Oil Dives after Russia Rejects Deeper OPEC+ Cut

March 6, 2020

Image by Maksym Yemelyanov - AdobeStock
Image by Maksym Yemelyanov - AdobeStock

Oil prices slid more than 4% on Friday after Reuters reported that Russia will not agree to steeper oil output cuts by OPEC and its allies to support prices. Brent and WTI crude futures tumbled by nearly $3 a barrel, or more than 5%, after the report. 

By 1124 GMT Brent crude was down $2.41, or 4.8%, at $47.58 a barrel. U.S. West Texas Intermediate (WTI) was down $2.19, or 4.7%, at $43.71. A Russian high-level source told Reuters on Friday that Moscow would not back an OPEC call for extra reductions in oil output and would agree only to an extension of existing cuts by OPEC and its allies, a group known as OPEC+. 

The Organization of the Petroleum Exporting Countries (OPEC) held talks with its allies on Friday after the group told Russia and others that it favored an additional 1.5 million barrels per day (bpd) of cuts until the end of 2020.

"What counts really is what Saudi Arabia does. If Russia joined, it will not add substantially. We need to see if OPEC goes ahead all alone," Olivier Jakob of Petromatrix consultancy said. Non-OPEC states were expected to contribute 500,000 bpd to the overall extra cut, OPEC ministers said. The new deal would have meant OPEC+ production curbs amounting to a total of 3.6 million bpd, or about 3.6% of global supply.

 "Our balances suggest that at least 2 million bpd needs to be removed from the market during Q2 to ensure stabilization in oil prices," said Bjoernar Tonhaugen, head of oil markets at Rystad Energy. 

"If this results in OPEC not going through with their own proposed 1 million bpd cuts in Q2, the result ... could be devastating. Brent could swiftly drop 15% to the low $40s and WTI to the high $30s in this scenario." 

Global stock markets tumbled on Friday as disruptions to business from the spreading coronavirus epidemic worsened. European shares opened sharply lower, with travel stocks bearing the brunt. 

However, after marking its worst weekly performance since the 2008 financial crisis a week ago, the MSCI All-Country World Index was up 1.7% on the week.

Even with the deeper cut, Goldman Sachs said the OPEC+ deal would not have prevented a global oil market surplus in the second quarter. The bank maintained its Brent price forecast at $45 a barrel in April. 

"Ultimately a rebound in demand, not supply cuts, will be the necessary catalyst for a sustainable rebound in prices," the bank said. Meanwhile, ANZ said that global oil consumption could fall by 1.6 million bpd in the first half of 2020 and contract by about 300,000 bpd for the full year. "Growth may return in H2 (second half of 2020) but is unlikely to be enough to offset the losses," the bank said. 

(Reporting by Julia Payne Editing by David Goodman)



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