G20: Seeking a Saudi-Russian Pledge on Oil

Published on March 24, 2020

The pressure is mounting from leaders across the globe on Saudi Arabia and Russia to produce a “cooperative understanding” that both Riyadh and Moscow can sign off in a G20 statement after this Thursday’s teleconference meeting pledging that the oil producing members of the G20 will work towards “stabilizing,” if not “supporting,” the oil markets.

The G20 affirmation on oil will more or less be in direct response to the G7 statement earlier today calling “on oil-producing countries to support international efforts to promote global economic stability.” With the Kingdom holding the rotating presidency of the G20 this year, Saudi Crown Prince Mohammed bin Salman will be chairing the tele-conference call, which will be joined by Russian President Vladimir Putin.

We understand there would most likely be little, if any, specifics or details at this time behind any statement vowing a joint effort that includes the Kingdom and Russia to support the oil markets. There is enormous and growing political pressure on the Saudi Crown Prince, both within the Kingdom and outside from other OPEC producers and, increasingly, from the United States, to step back from the threats to flood the oil markets with cheap Saudi crude.

We believe the G20 forum and the collective statement, joined by Russia and endorsed by the United States, can provide the face-saving mechanism for the Saudi Crown Prince to step back from the output wars. The Crown Prince may also be looking for a public statement or tweet from President Donald Trump affirming US support for the new Saudi contribution to the G20 response to address the coronavirus crisis.

A tentative olive branch was offered to Riyadh already in a statement issued immediately after Russian Energy Minister Alexander Novak met with the heads of the Russian oil companies on Monday noting that they saw little merit in increasing oil output. We understand it was issued as an explicit public signal to the Saudis that Russian companies will not aggressively compete for market share, at least for now.

Saudi Arabia has of course threatened to raise its output to as high as 13 million barrels per day in recent weeks. But it in fact has been struggling to sustain output anywhere near 12 million bpd, and is said to have already been diverting output meant for domestic use to export markets to meet contract commitments made for April cargoes.

We believe the Kingdom may tone down its threats of higher output and begin trimming back crude exports by the time Saudi Aramco’s official selling prices for May cargoes are listed in the first week of April. In addition, the Kingdom could revert some of the current supply back to domestic use, especially in light of the pending seasonal summer surge in demand.

Most of the G20 meeting will be focused on the immediate global response on the health and medical fronts to the coronavirus crisis. With the enormous collapse in global economic activity and worldwide aggregate demand, there will be commitments on “action plans” on the economic, fiscal, and monetary fronts as well, which will, if all goes well, include the statement about seeking to support the oil markets.

It will be next to impossible for the oil producers to follow through on specifics of supply policies until they can gauge the full extent of the demand destruction in the collapse of global growth, or get a reliable working estimate on how long the drop-off in demand will last.

But under a scenario taking shape, the Saudi-Russian affirmation of a cooperative effort at the G20 could mark the start of an ongoing diplomatic process to work back towards an OPEC+ revised agreement on output quotas no later than the early June OPEC and OPEC+ ministerial meeting.

That scheduled meeting could in fact be brought forward if the crude oil demand picture becomes a little clearer – or the situation even more dire. There is also the unconfirmed possibility US producers will be invited to attend the next OPEC+ meeting, if it indeed takes shape, with an “observer” status as Norway has at present.

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