Saudi Arabia’s oil minister said the price war it started last month that drove global benchmark Brent crude to 18-year lows was an “unwelcome departure” from its strategy to pursue collective oil cuts.
Abdulaziz bin Salman, who is the son of the king, said in an interview with the FT that the kingdom’s moves to escalate production and drastically cut export prices were necessary to create a financial buffer for its economy.
“[Engaging in a price war] was an unwelcome departure from our end, but we had to because of a desire to capture some revenues versus sitting on our hands and doing nothing,” said Prince Abdulaziz.
The kingdom, the world’s biggest oil exporter, pursued a shock-and-awe strategy after Russia was reluctant to enact deeper and more prolonged cuts. It coincided with a demand collapse triggered by the coronavirus outbreak and caused widespread pain across the oil industry.
President Donald Trump put pressure on Saudi Arabia to engage with Russia and end the price war, ultimately securing a diplomatic victory that also benefited the US shale industry.
The world’s largest-ever supply cut deal, struck on Sunday between Opec and Russia with broad backing from the US and other G20 nations, was an indication “we are not changing our approach”, Prince Abdulaziz said.
The so-called Opec+ group will cut 9.7m barrels a day from May.
Prince Abdulaziz emphasised that cuts could ultimately amount to 20m b/d or higher once they took into account contributions from other countries such as the US that were not part of the curbs deal.
“If prices stay within the border of $35-$40 a barrel . . . I wouldn’t be surprised if natural declines are even more severe as we move into the next few months,” he said.
Yet oil traders had little faith in producers’ abilities to reach the 20m b/d target and doubted the cuts were close to offsetting the demand collapse amid global lockdowns and travel bans. Brent crude dipped below $30 a barrel on Tuesday before recovering slightly.
Despite Saudi Arabia accelerating supply to record levels of 12.3m b/d and officials talking the market down at every opportunity over the past month, Prince Abdulaziz said: “We don’t have some sadistic approach of killing competition.”
He added: “As a long-term producer, we care more about a prosperous world economy that brings a prosperous level of demand. We are not engaged in any type of zero-sum game.”
Prince Abdulaziz sought to patch over the dispute that collapsed a three-year oil alliance with rival Russia last month, saying that “we don’t need divorce lawyers yet”.
“We could have weathered the situation and stayed for a long, long while, but it would have been extremely destructive,” he added, noting the financial pain for producer economies. As storage tanks have filled up, Saudi Arabia has also struggled to sell its extra oil, according to people familiar with the matter.
Prince Abdulaziz said the kingdom had always sought a cut as long as it was “equitable”.
Yet, the oil production deal achieved in recent days almost unravelled over a squabble with Mexico, which is part of the Opec+ group and wanted to curb output by less than other countries.
“Pragmatism”, he said, ultimately prevailed, despite the kingdom’s persistent concerns that other nations might ask for exemptions of their own, undermining the alliance.
In May, the kingdom will cut its production to just under 8.5m b/d.
When asked about longer-term demand and whether the coronavirus outbreak might change consumption patterns, Prince Abdulaziz said oil would continue to be a major energy source for decades.
“I’m not willing, yet, to forfeit that,” he said.