Saudi Arabia is pushing to make a substantial cut in oil production when Opec and its allies meet next week, as global energy producers scramble to respond to the coronavirus outbreak that has crippled demand.
The kingdom is asking producers including Russia to sign up to a collective production cut of an additional 1m barrels a day, according to five people familiar with the talks, a significantly higher amount than provisionally discussed when the so-called Opec+ group agreed to convene.
The plan, which was discussed during a visit by Opec secretary-general Mohammad Barkindo to Riyadh last week, is designed to show oil producers are able to respond to the sharp reduction in demand created by a virus that has paralysed global supply chains and stifled international travel.
Under the proposal, Saudi Arabia would account for the bulk of the new 1m b/d cut, while Kuwait, the United Arab Emirates and Russia would split the rest. The deal has not yet been agreed, however, with Moscow still hesitant to participate in a substantial cut when the full extent of the coronavirus impact is not yet known.
Earlier this month a technical meeting of the top Opec and non-Opec members of the alliance recommended reducing production by an additional 600,000 b/d to help balance the market, but that was before the coronavirus had spread far beyond China’s borders.
Brent crude, the international oil benchmark, has fallen to a year-low near $50 a barrel this week, dropping more than 10 per cent as coronavirus outbreaks have spread to northern Italy, South Korea and parts of California.
Oil traders fear demand for fuel will be severely curtailed if western governments decide to impose further lockdowns on towns and cities affected by outbreaks. China’s consumption slumped by around a quarter earlier this month at the peak of the country’s quarantines and travel restrictions.
Opec, which has been co-operating with Russia since 2016, has been struggling to respond to the sudden collapse in oil demand. Prices had been trading as high as $70 a barrel as recently as early January.
Analysts have become increasingly gloomy about global oil demand growth this year, with some predicting it will flatline. Earlier forecasts predicted an expansion of at least 1 per cent, or more than 1m b/d.
Adding a further 1m b/d to existing production cuts would take the Opec+ group’s total reduction to more than 3.1m b/d, its biggest curtailment since 2008, following the global financial crisis.
But traders say the group needs to respond quickly or risk prices dropping even further.
“The market is a falling knife,” said Roger Diwan at IHS Markit, a consultancy. “We don’t know what will happen to demand in Europe or Asia.”
Opec members including Saudi Arabia wanted to bring next week’s Vienna meeting forward to late February, but Russia would not agree. Russian companies are less keen on cutting output but have gone along with the production deal since 2016 as it has been supported by President Vladimir Putin, who sees an oil-based alliance with Saudi Arabia as a way of increasing his country’s clout in the Middle East.
Saudi Arabia’s de facto ruler, Crown Prince Mohammed bin Salman, has pushed for the alliance with Russia as the two energy-dependent countries have seen their revenues slashed by the rise of the US shale industry in the past decade.
If the 1m b/d extra cut is agreed, it would come on top of 2.1m b/d of cuts announced by the producer group in December, producer countries moved to bolster what was already expected to be an oversupplied market in the first half of 2020.
Saudi Arabia, which tried to surprise traders in December by announcing a bigger cut than widely floated before the last meeting, could again push for an even larger cut, according to a person close to the kingdom.
Russian energy minister Alexander Novak has dragged his feet ahead of previous agreements, before ultimately signing up.
Mr Novak conceded on Thursday that the group’s earlier projections for only a small hit to oil demand from the coronavirus outbreak would likely need to be increased.
“We need to see how the situation with coronavirus develops,” Mr Novak was quoted as saying by the Interfax news agency. “As you can see, there are already cases in Europe today, so forecasts are likely to be revised.”
Additional reporting by Nastassia Astrasheuskaya in Moscow