Ever since it became clear the outbreak was savaging energy demand in China – and oil prices everywhere – Riyadh has been pushing for swift production cuts to compensate.
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“They’re sitting in very different places — clearly, Putin has an advantage,” said Ed Morse, head of commodities research at Citigroup Inc. “The fact is that Russia has a budget that can be balanced at less than $50 a barrel, and the Saudis don’t.”
That gives Moscow the upper hand when the countries sit down to debate a joint policy on March 5 to 6. But while slumping prices put the kingdom and its energy minister under tremendous pressure, growing signs that the virus imperils the global economy may ultimately work in Riyadh’s favour.
It’s six weeks since the Saudis first sounded out the Kremlin about an emergency meeting of the Organization of Petroleum Exporting Countries and its allies. Back then, oil prices were just starting to buckle as the effects of the coronavirus on China became clear, and the kingdom believed the group needed to urgently slash output.
Its proposals were met with scepticism. OPEC+ had just announced a new round of supply cutbacks in December to offset another flood of American shale oil. Did Moscow really have the appetite to cut again, especially as the impact of the epidemic was unclear?
“Russia, per usual, played a cautious game that left both the Saudis and the market hanging,” said Mohammad Darwazah, an analyst at consultant Medley Global Advisers.
After shrugging off repeated requests from the Saudis, Putin finally agreed to speak with King Salman bin Abdulaziz on the phone on Feb. 3. There was no agreement for an emergency meeting, but the next day OPEC+ convened an ad-hoc session of technical experts to assess the virus’ impact on fuel demand. Their talks spilled into a third, unscheduled day as Russia’s representative refused to ratify any proposals.
The committee finally recommended 600,000 barrels a day of new output cuts – which would have deepened an existing OPEC+ cutback of 2 million barrels a day by almost a third. Russian Energy Minister Alexander Novak said he would respond to the proposal within a few days, but instead kept OPEC waiting for more than a week. When the Kremlin at last made a statement, it disclosed only that it remained undecided.
By mid-February, any hopes for an urgent cut had evaporated. A WhatsApp messaging group set up by delegates to coordinate logistics for an emergency meeting was dissolved as soon as it started. OPEC’s Vienna-based secretariat duly distributed invites for a conference on the originally scheduled dates of March 5-6.
The Saudis accepted defeat, but their alarm about the oil market was still real.
As the crisis unfolded it became clear that demand in China, the world’s biggest oil importer, had slumped by about 20%, tumbling by 3 million barrels a day as the coronavirus forced the cancellation of flights, shuttered businesses and led to the quarantine of millions. Global consumption could fall this year for the first time since the financial crash a decade ago, according to consultant FGE.
Slumping oil prices threaten both the kingdom’s ability to fund generous social spending, and ambitious plans by the heir to the throne, Crown Prince Mohammad bin Salman, to transform the economy. As a result, he is exerting immense pressure on his half-brother, Prince Abdulaziz bin Salman, appointed as energy minister a mere five months ago. His predecessor, Khalid Al-Falih, was dismissed after just three years in the job.
At a closed-door meeting in Riyadh last week, Prince Abdulaziz was frank about the urgency of the situation, equating the oil market to a house on fire. In such crises, the only option is to send for the fire brigade, he said, according to people who attended the event.
Events of the past week have vindicated that position, with crude prices plunging the most since 2011 as the virus spread across the globe, with serious outbreaks in South Korea, Iran and Italy. Crude slumped below $50 a barrel in London on Friday, and could sink to less than $30 if OPEC+ doesn’t act, Standard Chartered Plc predicted.
Though they lost the opening exchange, the Saudis may yet prevail at the talks in Vienna and persuade Moscow to join them in making additional supply cuts.
“Russia is staring in the face of $40 a barrel,” making it more willing to act, said Citigroup’s Morse.
The coalition is making a renewed push to reach an agreement, OPEC Secretary-General Mohammed Barkindo said on Thursday. And Prince Abdulaziz, a veteran petroleum diplomat well-versed in rescuing deals that seemed impossible, isn’t giving up.
Each time OPEC+ debates new output restraints, Russia typically shows resistance, often pointing to pressure from companies like Rosneft PJSC, which aren’t fully controlled by the state and want to pursue expansion projects. But once the right terms are offered, a compromise is usually reached.
“The Saudis may have lost the battle for an early emergency meeting,” said Helima Croft, head of commodity strategy at RBC Capital Markets LLC. “But I suspect that they will be able to win the war for a deeper cut.”
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