Saudi Arabia wary of costly slow response as China virus knocks oil: sources

Published February 12, 2020
Saudi Arabia in the past has often orchestrated production cuts or increases to keep oil prices at a preferred level. — Reuters
Saudi Arabia in the past has often orchestrated production cuts or increases to keep oil prices at a preferred level. — Reuters

Saudi Arabia wants global oil producers to agree a quick oil supply cut as China's coronavirus knocks demand, aware that delays in the past led to costly price collapses, sources familiar with the kingdom's thinking have told Reuters.

Read more: China virus death toll tops 1,100 as new cases fall

Riyadh has been working to convince Organisation of the Petroleum Exporting Countries (Opec) producers and allies led by Russia, a group known as Opec+, that they need to act sooner rather than later.

Nearly all OPEC members have expressed support for the proposed cut in supply, including Venezuela and Iran, who have often in the past been out of step with de facto Opec leader Saudi Arabia on supply policy. But Russia has not yet expressed a position, frustrating some other producers.

Riyadh sees a potentially bigger impact on oil demand this time than the 2002-03 Severe Acute Respiratory Syndrome (Sars) epidemic due to China's now far larger role in the global economy, the sources said.

Oil prices have fallen by more than $11 a barrel this year to $54, alarming producers, as the coronavirus, which has killed more than 1,000 in China, spreads.

One Opec source said Riyadh wanted a quick supply cut to “put a floor under the prices”. “The Saudis want to be proactive and to keep oil prices at $60 a barrel or above,” the source said.

Opec's biggest producer, Saudi Arabia in the past has often orchestrated Opec production cuts or increases to keep oil prices at a preferred level.

But they have not always acted early enough.

Opec was criticised for not preventing oil prices from spiking during a 2008 rally that saw Brent crude top $147 per barrel on supply fears.

The group was equally slow to react to the global financial crisis which unfolded and saw demand collapse and oil prices fall towards $30 per barrel.

As the world began to recover from that crisis, global oil demand spiked, but Opec was slow to raise production, prompting Brent to rally again.

This time around, Opec+ may have lost precious time to prevent an oil price decline, a source familiar with Saudi oil thinking said, upping the ante on Moscow and other producers to support a proposed cut.

Last week, a technical panel advising Opec+ recommended an immediate additional output cut of 600,000 barrels per day (bpd), sources told Reuters.

“This is about taking preemptive measures against future uncertainties [...] it is about lessons learnt from the past,” one of the sources said.

Venezuela's oil ministry issued a statement on Tuesday backing the cut, a rare public expression of its position on Opec policy ahead of a meeting.

Iran's oil minister over the weekend said the country would support the deeper cuts if a majority of members agreed with it.

A current Opec+ agreement aims to cut output by 1.7 million bpd until the end of March and Saudi Arabia has been voluntarily cutting an additional 400,000 bpd, meaning Opec+ is effectively curbing production by 2.1 million bpd.

Sources said the technical panel also recommended this deal be extended until the end of 2020.

“Saudi officials knew consumption would decline. They also knew that, while the coronavirus impact was uncertain, the market was responding,” energy consultancy PK Verleger LLC said in a research note.

“Following the Greenspan model, they understood that something needed to be done right away,” it said, referring to quick action taken by former US federal reserve chairman Alan Greenspan in response to a one-day stock price tumble in October 1987.

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