Will OPEC and allies be able to convince Russia for biggest oil cut?

All eyes will be on Russia at the gathering of OPEC countries and their allies Friday, with the cartel hoping to convince Moscow to back drastic production cuts to counter the effects of the coronavirus outbreak.

On Thursday ministers from the OPEC grouping recommended a cut of 1.5 million barrels per day in the face of the global slowdown caused by the epidemic and the resulting fall in demand for oil.

According to the plan drawn up by OPEC, allies in the so-called OPEC+ grouping -- Russia foremost among them -- would take on 500,000 barrels of the cuts.

Late on Thursday OPEC said in a statement that delegates had held further consultations and wanted the proposed cuts to run until the end of 2020, not just until the end of June as originally proposed.

 

Producers had already had to contend with abundant supplies weighing on prices but in recent weeks the spread of COVID-19 across the world has sent prices plunging.

The European benchmark, Brent crude, on Sunday sank to levels not breached since July 2017 and has yet to stage a meaningful recovery.

The 23 producers gathering on Friday have since early 2017 tried to support prices through strict quotas on production, initially of the order of 1.2 million barrels per day.

In December they announced a further 500,000 barrel cut with OPEC kingpin Saudi Arabia adding a "voluntary" contribution of 400,000 barrels.

Tamas Varga of PVM told AFP that even the extra cuts recommended on Thursday "might not be enough", saying OPEC's new forecasts for a drop in global oil demand growth may turn out to be "overoptimistic".

"This is a critical moment for OPEC+ as a holdout by the Russians could drive oil prices to their financial crisis lows," analyst Craig Erlam at Oanda said on Thursday.

Russian officials have been quoted in recent days as being much cooler on the idea of big production cuts, saying that current price levels are satisfactory for Moscow and its budget planning.

The big players in Russia's oil industry fear that an aggressive policy of output cuts will only lead to lost revenue and ceding market share to competitors, particularly the United States with its booming shale oil sector.

Moreover, the Kpler energy analysis company points out that Russia has increasingly been acting as "internal competitor" in the relatively new OPEC+ format.

"In recent years, not only Russia has pledged fewer production cuts than Saudi Arabia,... its compliance with the deal has also been minimal," the company noted.

Erlam said that "Russia will likely capitulate" on Friday but added that Moscow "will do everything possible to drag this out to the last moment to secure the smallest share of the 1.5 million in production cuts".

As well as grappling with the economic fallout from the coronavirus epidemic, delegations have been affected in a much more practical way at this meeting amidst more than 40 confirmed cases of the virus in Austria.

Delegates have had their temperature tested on the way into the building and been advised to avoid handshakes.