Barely 48 hours after unleashing a full scale oil market share war that drove crude prices plunging to around $30, we understand that Saudi officials are nervously weighing a policy recalculation to scale back and are seeking to keep the door open to a possible return to the OPEC+ table in a back channel outreach to Russia.
** It is our understanding that Riyadh briefed Beijing before they launched the oil price war on Saturday and also asked China to act as an intermediary to convey its message to Moscow with the hope Russia would soon begin new negotiations with the Kingdom again. The Chinese have taken the outreach to signal that despite the acrimonious outcome to the failed OPEC+ meeting, Saudi Arabia and Russia – who rank first and second in crude oil exports to China – could come to a new agreement, “in due course.”
** We believe however that the OPEC+ Joint Technical Committee (JTC) meeting in Geneva on March 18 would be too early for a new agreement. It is our understanding that neither the Saudis nor the Russians are anywhere near coming to the table by then. Both are positioning their economies and rhetorically boasting their wherewithal to ride out the oil price whirlwind. The key will be any change in the tone in how each of the energy rivals reply to the Chinese brokering a potential return to the table.
** We also understand that there is a reassessment of the market share strategy already underway in Riyadh. But the current thinking is that Riyadh will need to wait – in terms of weeks and maybe a month or two but not more than that – to see how and to what extent the flood of Saudi crude is flushing out the Russians and the others oil producers, like Iraq, which has been cheating on its quotas. Likewise, to some extent, how the American shale producers respond to the collapse in crude prices will play a role in the Saudi strategy. Left unspoken, but also high on the Saudi minds, is how the oil price collapse may add to the crisis dynamics in Iran.
** Indeed, the Saudi rough estimate, for now, is that crude prices will naturally trace their way back into a $40-$50 price range…in due course of time.
** While it is very unlikely the top leaders from the two countries will hold imminent talks, on the quiet much less in public, we understand the point Chinese officials will stress is that even if China is the world’s largest oil importer, a sustained collapse in oil prices is not good even for China’s economy.
** Beijing is very fearful that a sustained Brent crude oil price fall below $30 a barrel would help fuel a global economic recession, the consequences of which would be hard to manage or control. Chinese officials have therefore conveyed to the Saudis that their move on Saturday could be dangerous. And furthermore, they warn that if the essence of their shock and awe strategy was to get Russia back to the negotiating table as quickly as possible, they should weigh a very real possibility that Russian President Vladimir Putin may not hesitate to hit back at the Saudis with a “hard-on-hard” response.
** The Chinese assessment of the confrontation between the two energy rivals, which are both considered strategic allies to China, is of Russia being able to weather a period of low energy prices for longer than Saudi Arabia, where even the $58 oil price assumed in Riyadh’s 2020 budget would result in a 6.4% deficit (see SGH 3/8/20, “Saudi Arabia: The OPEC Debacle”).
** And a key near-term date on the Saudi calculations is when the golden handcuffs on Saudi domestic investors in the initial Saudi Aramco IPO come off this June. The current Aramco share price has dropped to 28 Riyals from its initial launch price of 32, with the selling coming from a handful of foreign-owned institutions and banks with a domestic presence that were allowed to invest in the domestic Aramco share offering. There is a sense the Public Investment Fund at some point will step in with a share purchase support program on the Tadawul, but not until the institutional selling has bottomed out.
** But that June date looms large in the Saudi thinking, and there is likewise a regularly scheduled OPEC+ meeting set for June. And by then the true demand impact of the coronavirus will be clearer and crude prices may already be rising from what the Saudis believed is panicked selling in the market that tends to overreact in either direction.
** And if needed by June, Saudi Arabia may go it alone with Kuwait and the UAE – with or without the Russians – and unilaterally cut output, albeit from the currently higher levels, in an effort then to help stabilize and underpin crude oil prices back to that $40-$50 target range. That moment could of course come well before June, making the possible window for a Saudi shift in its oil strategy any time between April through the end of May, but it would seem by no later than mid-June.