Brent crude, the global benchmark, plunged the most in more than a decade after Russia refused to bend to the will of Saudi Arabia, whose high-stakes gamble pushed the group past breaking point.
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The Kremlin’s budget is more resilient to low prices than its Middle Eastern allies. Russia also argued that cheap crude will help wipe out competition from U.S. shale and turn investors against companies that are already struggling, said a person familiar with the discussions.
The outcome is bad for energy giants like Exxon Mobil, resource-dependent countries from Latin America to Central Asia, and companies like BP that are trying to reinvent themselves as greener producers. Low prices will help some economies though, as a stimulus in the face of the raging virus.
The breakdown is the biggest crisis since Saudi Arabia, Russia and more than 20 other nations created the OPEC+ alliance in 2016. The group, controlling more than half of the world’s oil production, has underpinned prices and reshaped the geopolitics of the Middle East — increasing President Vladimir Putin’s clout in the region. But it has come under increasing strain over the past year.
The oil market now faces double jeopardy. It won’t just miss out on the output cut of 1.5 million barrels a day Saudi Arabia was pushing, but the group’s existing 2.1-million-barrel supply reduction won’t continue beyond the end of this month.
Oil traders will now be looking for signs of whether Saudi Arabia, Russia or any of the other OPEC+ nations — unshackled from the cartel’s restrictions and with budget holes to fill — could actually increase production.
Energy Minister Alexander Novak said Russian companies are free to ramp up idle capacity from April 1. When asked if Aramco could do the same, his Saudi counterpart, Prince Abdulaziz bin Salman, told reporters, “I’ll keep you wondering.”
The last time those countries were free from the fetters of OPEC+ output limits, in the second half of 2018, they both jacked up output to record highs, adding 1.5 million barrels a day between them.
Brent crude slumped 9.4 percent for its biggest one-day drop since the 2008 financial crisis, closing at $45.27 in London.
“The coronavirus has claimed one victim: the alliance of oil producers,” said Roger Diwan, an analyst at consultant IHS Markit and a veteran OPEC watcher. “Facing a dramatic decline in demand, they are throwing in the towel on market management. We are likely to see the lowest oil prices of the last 20 years in the next quarter.”
After days of haggling, the alliance had little to show for its efforts. The scheduled press briefing was canceled. A terse statement that didn’t set a date for another rendezvous — and from which two numbered bullet points had been excised — was drafted but never published.
The OPEC+ meeting in the diary for June was unlikely to go ahead, a delegate said, and the dates were removed from the cartel’s website. Another person said Russia was still willing to join those talks.
Senior OPEC officials, from Secretary-General Mohammad Barkindo to United Arab Emirates Energy Minsiter Suhail Al Mazrouei, still held out hope that Russia would come back into the fold.
“We are hoping that our friends from Russia need more time to think about it and maybe come back,” Mazrouei said. “Whenever they want to meet, we can meet in 10 days, in two days, whenever they are ready we can meet.”
The meeting collapse comes at a difficult moment for both architects of the OPEC+ deal. In Saudi Arabia, Mohammed bin Salman, the young Crown Prince who is trying to re-tool his country’s economy, will face strong headwinds. Riyadh will likely have to dip into its cash reserves to make ends meet.
And in Russia, Putin is entering a politically delicate period, with a referendum next month on constitutional reforms that are seen as enabling a transition of power in 2024, when he must step down as president. A collapse in the oil price would likely be followed by a decline in the value of the ruble and a spike in inflation.
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