Saudis fear costly oil price collapse if output cuts delayed

Saudi Arabia wants global oil producers to agree to 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.

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

Saudi Arabia sees a potentially bigger impact on oil demand this time than during 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 people 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.

Saudi Arabia is OPEC’s biggest producer and has in the past often orchestrated OPEC production cuts or increases to keep oil prices at a preferred level.

But OPEC has 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 that 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. This has upped 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 news agency. 

“This is about taking pre-emptive measures against future uncertainties … it is about lessons learned from the past,” one of the sources said.

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.

Russia is still studying the panel’s proposed deeper oil output cut, Minister of Energy Alexander Novak said on Tuesday, with Russia’s delayed response frustrating some OPEC players.

“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,” said the note, referring to quick action taken by former United States Federal Reserve Chairman Alan Greenspan in response to a one-day stock price tumble in October 1987.