Saudi Arabia has so far been thwarted by Russia in its efforts to consolidate oil markets against the coronavirus. But when they meet next week, the humble kingdom could still win.
Since it became clear that the epidemic has exploded demand for energy in China – and oil prices everywhere – Riyadh has lobbied for rapid production cuts to compensate. Russia, the most important partner in the producer coalition, has rejected these demands, stressing the dominant role that President Vladimir Putin has played since forming an alliance with the Saudis three years ago.
“They’re sitting in very different places – clearly, Putin has an advantage,” said Ed Morse, head of commodity research at Citigroup Inc. “The point is, Russia has a budget that can be balanced at less than $ 50 a barrel and the Saudis not. ”
This gives Moscow the upper hand when the countries sit down to debate a common policy from 5 to 6 March. But if falling prices put the kingdom and its energy minister under tremendous pressure, growing signs that the virus is jeopardizing the global economy could ultimately work. Riyadh’s favor.
It has been six weeks since the Saudis first surveyed the Kremlin about an emergency meeting of the Organization of the Petroleum Exporting Countries and its allies. At the time, oil prices were just beginning to drop when the effects of the coronavirus on China became clear, and the kingdom believed that the group should urgently cut production.
His proposals were met with skepticism. OPEC + had just announced a new round of supply cuts in December to offset a new wave of American shale oil. Did Moscow really have the appetite to cut again, especially since the impact of the epidemic was not clear?
“Russia, as usual, played a cautious game that left the Saudis and the market on hold,” said Mohammad Darwazah, analyst at Medley Global Advisers, consultant.
Undecided Kremlin
After ignoring repeated requests from the Saudis, Putin finally agreed to speak on the phone with King Salman bin Abdulaziz on February 3. There was no agreement for an emergency meeting, but the following day, OPEC + convened an ad hoc session of technical experts to assess the impact of the virus on fuel demand. Their talks took place on a third unforeseen day, the representative of Russia having refused to ratify any proposal.
The committee ultimately recommended 600,000 barrels per day of further production reductions – which would have worsened an existing OPEC + reduction of 2 million barrels per day by almost a third. Russian Energy Minister Alexander Novak said he would respond to the proposal in a few days, but instead let OPEC wait more than a week. When the Kremlin finally made a statement, it only revealed that it remained undecided.
By mid-February, all hope of an urgent reduction had evaporated. A WhatsApp messaging group set up by delegates to coordinate the logistics of an emergency meeting was disbanded from the start. The Vienna-based OPEC secretariat has duly distributed conference invitations on the dates originally scheduled for March 5 to 6.
The Saudis accepted defeat, but their alarm on the oil market was still real.
Consumer accident
As the crisis erupted, it became clear that demand in China, the world’s largest oil importer, had dropped by about 20%, dropping 3 million barrels a day as the coronavirus forced the cancellation of flights, closed business and led to forty million. . World consumption could fall this year for the first time since the financial crash ten years ago, according to consultant FGE.
Falling oil prices threaten both the kingdom’s ability to finance generous social spending and the ambitious plans of the heir to the throne, Crown Prince Mohammad bin Salman, to transform the economy. As a result, he is putting immense pressure on his half-brother, Prince Abdulaziz bin Salman, who was appointed energy minister just five months ago. His predecessor, Khalid Al-Falih, was laid off after just three years of work.
At an in camera meeting in Riyadh last week, Prince Abdulaziz was frank about the urgency of the situation, equating the oil market to a burning house. In such crises, the only option is to send firefighters, he said, according to those who attended the event.
The events of last week confirmed this position, as crude prices have plunged the most since 2011 as the virus spread around the world, with serious epidemics in South Korea, Iran and Italy. Crude oil fell below $ 50 a barrel in London on Friday and could drop to less than $ 30 if OPEC + fails to act, predicted Standard Chartered Plc.
Although they lost the opening trade, the Saudis could still prevail in the Vienna talks and persuade Moscow to join them in making further supply cuts.
“Russia is looking at $ 40 a barrel,” which makes it more willing to act, said Morse of Citigroup.
The coalition is redoubling its efforts to reach an agreement, said OPEC secretary general Mohammed Barkindo on Thursday. And Prince Abdulaziz, a veteran oil diplomat who knows the seemingly impossible deals well, doesn’t give up.
Whenever OPEC + debates new production restrictions, Russia has generally shown resistance, often pointing to pressure from companies like Rosneft PJSC, which are not fully state-owned and wish to pursue projects. expansion. But once the right conditions are proposed, a compromise is generally reached.
“The Saudis may have lost the battle for a quick emergency meeting,” said Helima Croft, chief commodity strategy at RBC Capital Markets LLC. “But I suspect they will be able to win the war for a deeper cut.”