Saudi Arabia: Large-scale Cut Unlikely

Published on February 3, 2020
SGH Insight
** Saudi Arabia is unlikely to press for large-scale near term output cuts of up to 1 million barrels per day when the OPEC Joint Ministerial Monitoring Committee meets this week, but it will support a more cautious collective cut in the OPEC+ output of around 500,000 barrels per day as the most prudent response to the impact of the Chinese coronavirus outbreak on crude oil demand.

** And as of today, Saudi officials are also likely to seek a delay on a decision whether to bring forward to February the scheduled March OPEC+ Ministerial meeting until there are at least some clearer indications of how sustained the drop in crude demand will prove to be, and if others are indeed willing to take action, however small, as the new Saudi Energy Minister has repeatedly advised that everyone was in this together.

** There is a concern also in signaling a panic – a fear voiced by Russian oil officials – and which might elevate expectations for the deeper output cuts Saudi oil officials are for now very reluctant to commit to when it is still unclear how sustained the drop in crude demand will be.
Market Validation
(Bloomberg 2/6/20)

Oil pared gains as an OPEC+ committee agreed on a required level of output cuts, but didn’t reach a decision on an emergency meeting as Russia resisted. The panel recommended a production cut of 600,000 b/d to offset the demand impact from the coronavirus outbreak. Following three days of discussions in Vienna, there was no agreement on if ministers from OPEC and its allies should meet this month to ratify the JTC’s suggestion. Russian Energy Minister Alexander Novak reiterated on Thursday that his country needs more time to assess the impact of the outbreak.

** Saudi Arabia is unlikely to press for large-scale near term output cuts of up to 1 million barrels per day when the OPEC Joint Ministerial Monitoring Committee meets this week, but it will support a more cautious collective cut in the OPEC+ output of around 500,000 barrels per day as the most prudent response to the impact of the Chinese coronavirus outbreak on crude oil demand.

** And as of today, Saudi officials are also likely to seek a delay on a decision whether to bring forward to February the scheduled March OPEC+ Ministerial meeting until there are at least some clearer indications of how sustained the drop in crude demand will prove to be, and if others are indeed willing to take action, however small, as the new Saudi Energy Minister has repeatedly advised that everyone was in this together.

** There is a concern also in signaling a panic – a fear voiced by Russian oil officials – and which might elevate expectations for the deeper output cuts Saudi oil officials are for now very reluctant to commit to when it is still unclear how sustained the drop in crude demand will be.

** Despite some media reports that Riyadh was weighing dramatic near-term cuts in output by as much as 1 million bpd to “jolt” the oil markets, we understand the Saudis fear that such a sharp cut in the Kingdom’s output would risk sacrificing too much market share, especially to the crucial China market, and mostly to Russian oil companies.

** The Kingdom has also indicated it will proceed with Kuwait on their plans to stagger a planned resumption of output from the Neutral Zone over coming weeks. While those plans may seem to contradict the efforts to curtail output to counter the fall in demand, the threat of additional new output is also meant to encourage discipline among the other OPEC+ members to a near term decision on collective cuts to output.

** All that said, the Kingdom remains very concerned over a sustained fall in global crude oil demand and especially a fall in its crude exports to China. There is some sense in Riyadh that Beijing may use any temporary fall in prices to still purchase Saudi crude to rebuild its strategic oil reserves.

** Saudi crude oil output stood at around 9.744 million bpd in January, which is more or less right in line with its earlier commitments to keep its output below its most recent OPEC+ quota by around 400,000 bpd.

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