The energy ministers of the 25 OPEC+ oil producing states meeting in Vienna this coming Thursday and Friday will probably have a mixed reaction to the G7 statement issued earlier this morning: on the one hand, with oil prices having already led the downside on fears of slowing demand, they would have loved to have seen a more explicit, muscular response to the coronavirus damage to global growth, but on the other hand, as a wake-up call it may help forge an agreement on bigger collective output cuts.
** We believe Saudi Arabia will succeed in forging an OPEC+ agreement to trim collective output by at least 600,000 barrels per day at a minimum, given that this was the figure recommended by the Joint Ministerial Monitoring Committee a few weeks ago before the worsening global virus outbreak. We think there is a higher than even probability OPEC+ will agree to a larger 1 million bpd or more in output cuts that is being quietly pressed by Riyadh.
** And that is where the market pricing and public confidence in the run up to the weekend will be a factor: namely, the worse and scarier the outlook for global growth, the easier it will be for the Saudis to negotiate the larger output cuts. The discussions in Vienna will likely shift from a debate on the lower total to how to share the burden of the output cuts in the higher target total, and whether the cuts will be real or nominal for some members of the pact. The OPEC technical committee is meeting today and will forward its recommendations to the Ministers.
** To make the larger target in cuts work, we understand the Kingdom would promise to cut by the 600,000 bpd already on the table, on its own, with Kuwait and the United Arab Emirates increasing their share of the cuts to as much as another 250,000 bpd instead of 150,000 at present – but only if Russia and the other 21 member states cut by at least a total 200,000 bpd. The new output cuts would be in addition to the group also agreeing to renew the current agreement to keep output trimmed by 1.2 million bpd to its October 2018 levels.
** Russia has played its usual recalcitrant card going into the meeting but we believe Moscow in the end will enforce an output cut on the Russian oil companies. Russian support for the additional cuts, however, will be conditional on a commitment to review and potentially reverse part or all the new output cuts at the regularly scheduled ministerial meeting in June if the loss of global demand is less than feared from the coronavirus beyond China.
** We think Riyadh is likely to agree, in part because it has a gloomy view on how quickly the global economy will recover from the coronavirus impact, and is presuming an extension of the new additional cuts into the fall. In addition, Saudi concerns over potentially lost market share to the Russians in the crucial China market have been allayed by Chinese vows to maintain planned higher crude imports from the Kingdom despite a deep drop in the first quarter (see SGH 2/24/20, “Saudi Arabia: March Output Cuts Likely”).
** Compliance, as always, remains a not insignificant obstacle, with Iraq and Russia doing little to even bother disguising their non-compliance on the existing cuts, and Iraq exports in fact having increased by around 50k bpd in February. The renewed civil war in Libya has taken nearly 1 million bpd out of the global market to offset the extra crude, and Iranian crude exports have been erratic at best under the ongoing sanctions that are being imposed by the Trump administration.