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Oil drops 2% as steeper OPEC+ output cuts not yet agreed

LONDON (Reuters) – Oil prices slid 2% on Friday on concerns that Russia may not agree to a steeper OPEC+ output cut to support prices and on the spectre of a prolonged economic slowdown due to the coronavirus outbreak.

FILE PHOTO: Oil pump jacks work at sunset near Midland, Texas, U.S., August 21, 2019. REUTERS/Jessica Lutz/File Photo

Brent crude was down $1.20, or 2.4%, at $48.79 per barrel by 0954 GMT, while U.S. West Texas Intermediate (WTI) was $1, or 2.1%, lower at $44.90 per barrel.

The Organization of the Petroleum Exporting Countries (OPEC) was holding crunch talks with its allies on Friday after the group told Russia and others it favoured an additional 1.5 million barrels per day (bpd) of oil cuts until the end of 2020.

The new deal would mean supply curbs by OPEC and its allies, a grouping known as OPEC+, amounting to a total of 3.6 million bpd, or about 3.6% of global supplies.

Non-OPEC states were expected to contribute 500,000 bpd to the overall extra cut, OPEC ministers said. But Russia and Kazakhstan, both members of OPEC+, said they had not yet agreed to the deeper cut, raising the risk of a collapse in cooperation that has propped up crude prices since 2016.

Some analysts expected Moscow to ultimately endorse the agreement.

“If it says no, the entire union could collapse — and with it any new bilateral trade and investment deals in the pipeline as well as the strategic influence Moscow has secured by participating in the production agreement,” RBC Capital Markets said in a research note.

“There will be a flurry of high level calls between Moscow, Riyadh and Abu Dhabi to get the deal done.”

Concerns about the economic environment are overwhelming the positive impact of the proposed big output cuts, said Michael McCarthy, chief market strategist at CMC Markets.

Global stock markets tumbled on Friday as disruptions to business from the spreading coronavirus epidemic worsened. European shares opened sharply lower, with travel stocks bearing the brunt.

However, after marking its worst weekly performance since the 2008 financial crisis a week ago, the MSCI All-Country World Index was up 1.7% this week. <MKTS/GLOB>

Even with the deeper cut, Goldman Sachs said the OPEC+ deal will not prevent a global oil market surplus in the second quarter. The bank maintained its Brent price forecast at $45 a barrel in April.

“Ultimately a rebound in demand, not supply cuts, will be the necessary catalyst for a sustainable rebound in prices,” the bank said.

Meanwhile ANZ said global oil consumption could fall by 1.6 million bpd in the first half of 2020 and contract by around 300,000 bpd for the full year.

“Growth may return in H2 (second half of 2020), but is unlikely to be enough to offset the losses,” the bank said.

“(I) expect that it is just not OPEC and Russia looking to stabilise prices but also the U.S. producers,” said Jonathan Barratt, chief investment officer at Probis Group.

Reporting by Shu Zhang; Editing by Kenneth Maxwell and Susan Fenton

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