1 of 5Prince Abdulaziz bin Salman Al-Saud, Minister of Energy of Saudi Arabia, arrives for a meeting of the Organization of the Petroleum Exporting Countries, OPEC, and non OPEC members at their headquarters in Vienna, Austria, Friday, March 6, 2020. (AP Photo/Ronald Zak)
VIENNA (AP) — The price of oil is plunging amid doubts that OPEC will succeed in agreeing with ally Russia on cutting production to support prices as the virus outbreak disrupts the global economy.
The cartel is trying to convince Russia and other non-member producers to join in deep production cuts to prevent weak oil prices from falling further. Failure to strike a deal could mean more pain for Saudi Arabia’s state finances and for the U.S. oil patch, where thousands have been laid off.
Russia’s energy minister, Alexander Novak, entered the OPEC headquarters without answering journalist’s questions as officials prepared to take up the cartel’s proposal to cut output by 1.5 million barrels a day, of 1.5% of world production.
OPEC countries like Saudi Arabia and Iran say they need non-member allies to take 500,000 barrels of that cut on themselves.
Analysts say OPEC may struggle to keep oil prices from falling further as it remains unclear how much the turmoil in the global economy will affect the need for energy.
“There is still too much uncertainty regarding the amount of demand destruction,” analysts at research firm Petromatrix said in a note to investors.
The international benchmark for crude oil fell about 7% to $46.45 on Friday. It had been trading over $50 in recent days, and is down from $69 as recently as early January, before the outbreak.
Russia and other non-member countries have been working with OPEC in recent years and agreed on earlier cuts. However, Russia can tolerate low oil prices better than Saudi Arabia can. Saudi Arabia needs $83.60 per barrel to balance its state budget, according to the International Monetary Fund. Russia needs only $42.40 for its own kind of crude oil.
With oil under $50 a barrel, U.S. producers, including oil giants such as Exxon, are scaling back drilling as their profits get hit. The oil patch has already been shedding thousands of jobs and suffering through a surge of bankruptcies, and lower prices will exacerbate those problems.
The spread of the coronavirus has sharply reduced air travel and thus the demand for fuel, while industry in China, the world’s second largest economy, has been severely disrupted through shutdowns and travel restrictions.
Some economists think the global economy may shrink in the first quarter for the first time since the financial crisis, sapping demand for energy.
Oil production in the U.S., which is not part of OPEC and unlike Russia does not cooperate in its output decisions, has ramped up in recent years, flooding the market and keeping prices down.