What Happened

OPEC and non-OPEC allies (also known as OPEC+) have failed to agree on how much oil production to cut, despite the potential for massive disruptions in oil demand due to the coronavirus outbreak. According to a March 6 statement, OPEC said the two groups had not even agreed to extend the production cuts agreed to in December 2018, nor a date for another meeting. This followed OPEC ministers’ brief second-day meeting with the non-OPEC-member countries, during which Russian Energy Minister Alexander Novak said he was not authorized to agree to anything beyond a three-month extension of the old targets.

On March 5, OPEC proposed an aggressive production cut in its ministerial meeting, which it held without Russia or other non-members present. At the end of the meeting, it released a statement calling for a 1.5 million barrel per day (bpd) production cut through the end of June. The proposal included an OPEC cut of 1 million bpd and a non-OPEC cut of 500,000 bpd, with individual allocations left to be determined at the second meeting. The 14-member group also indicated that this was a "take it or leave it" offer, and not subject to negotiation other than the individual allocations. In a surprise move later that evening, Saudi officials met again with OPEC ministers at their hotel and issued a statement extending the 1.5 million bpd cut through the end of the year. That constituted an ultimatum to Russia, which Novak was instructed to decline during consultations with Russian President Vladimir Putin. When Riyadh and other OPEC members declined to negotiate further today, the meeting ended with no action.

Why It Matters

The Saudi-driven ultimatum to Russia — that is, demanding an aggressive cut and then extending it when Russia had not yet backed any action — forced OPEC into a corner. UAE Energy Minister Sohail al-Mazrouei has expressed hopes for negotiation once tensions between Saudi Arabia and Russia simmer down. But while a reconciliation in the near-term is possible, it's not probable.

At this point, it seems clear that Russia still expects the Gulf Arabs to do most of the heavy lifting, and also does not want to push prices back up prematurely, preferring to let U.S. shale producers and other competing supply be starved of capital. At current price levels, this strategy can reasonably be expected to bring U.S. production growth to a near halt, or possibly even a contraction toward the end of 2020. Russia sees such an outcome as helping relieve some of its short-term financial pain.

Saudi Arabia, however, is more focused on shoring up its current-year fiscal needs and public confidence in Crown Prince Mohammed bin Salman. While no longer bound by any commitment to restrain production to the current 9.7 million bpd of crude oil (as defined by OPEC), Riyadh will continue to be driven by its own financial interests, rather than seeking to punish Russia. The United Arab Emirates and Kuwait also will probably follow Saudi Arabia's lead, as will non-OPEC member Oman. But Riyadh's actions nonetheless remain worth watching closely, given Crown Prince Mohammed's penchant for mercurial swings in policy.

Oil Market Implications

In the wake of the OPEC announcement, the selloff in crude oil suffered one of the largest percentage losses in history on March 6. The fact that there is more global storage capacity available in the physical oil market could help prevent crude prices from rapidly plunging to the depths seen in early 2016, when there was serious worry about possible exhaustion of global storage capacity. For now, a steep enough contango will drive stock building and floating storage in tankers without a complete collapse. But things could still get much worse, given the coronavirus' massive yet still-uncertain impact on global oil demand.