Falanx Assynt Full Report
- Riyadh will continue to push for extended OPEC+ output cuts to sustain crude prices amid falling Chinese demand
- Bilateral ties between Crown Prince and President Putin will likely ensure agreement over moderate cuts at OPEC+ meeting in March
- Larger cuts will remain possible should coronavirus outbreak show signs of escalation and further depress Chinese demand in coming weeks
Russian officials said on 7 February that they required more time to consider a Saudi-led proposal to extend oil output cuts by an additional 600,000 barrels per day in the first quarter of 2020 following a meeting of the OPEC+ (which comprises the thirteen OPEC members plus ten non-OPEC producers) Joint Technical Committee in Vienna the previous day. The extraordinary meeting of the committee had been convened in response to falling oil prices, which dropped from around USD 65 per barrel in January to current levels of around USD 55 as a result of a drop in Chinese demand due to the spread of the novel coronavirus.
Riyadh exercises considerable influence within OPEC as the group’s de facto leader and has pushed to curb output levels in recent years to stabilise oil prices to try to prevent a repeat of the major mid-2014 oil price crash. Saudi delegates were, for instance, instrumental in pressuring the wider OPEC+ group to agree to production cuts which rose in late 2019 to a total of 1.7 million barrels per day and helped maintain an average price of USD 64 per barrel throughout last year.
Despite Crown Prince Mohammed bin Salman’s (MbS) Vision 2030 reform agenda, which prioritises economic diversification, hydrocarbon exports remain an essential source of state revenue. Indeed, the International Monetary Fund predicted in 2019 that Riyadh would require an average oil price of at least USD 80 per barrel to balance its budget. Saudi pressure for further output cuts thus primarily reflects concerns over the fiscal impact of falling oil prices. By contrast, Russian President Putin has suggested that Moscow could still balance its own budget with oil prices as low as USD 40 per barrel, which lessens pressure on the Kremlin to agree to further output cuts.
Falling oil prices have also damaged share prices in state-owned oil company Aramco, which fell for a fourth day on the domestic Tadawul exchange on 9 February falling by as much as 1.8%. Aramco was listed in December and Riyadh had at the time pressured OPEC to extend the current output cuts until March 2020 to raise the company’s valuation to around USD 2 trillion ahead of the IPO. The Crown Prince had hoped that strong performance on the domestic exchange would help facilitate a larger public offering in foreign exchanges in the next year, and Saudi pressure for additional cuts will also reflect a desire to sustain Aramco’s share price ahead of this.
Riyadh will continue to push for further cuts ahead of the next scheduled OPEC+ meeting in early March, particularly as newly appointed Energy Minister Prince Abdulaziz bin Salman will be keen to ensure this given MbS removed former Energy Minister al-Naimi in 2016 over his inability to sustain crude prices. Indeed, this will remain a priority for Riyadh in the next six months as it works to ensure Aramco’s foreign listing can proceed in the coming year. Given lower budgetary pressures on Moscow, Russia will likely remain hesitant as it will wish to retain its market share, as part of efforts to assert its own influence over oil markets as its output reached record highs in 2019. Strong bilateral ties between Putin and MbS however mean that a reduction of 600,000 barrels per day is plausible, and indeed the two held a phone call on 3 February reaffirming their cooperation to sustain oil price levels. Larger cuts also remain possible should the outbreak of coronavirus show no signs of abatement by early March, as other OPEC+ members become increasingly concerned over the impact of the outbreak on long-term oil revenues.
Falanx Assynt is a leading global intelligence consultancy, it is part of the Falanx Group (LON:FLX).