Saudi Arabia plans to keep oil production steady despite a recent slump in prices, fearing any bigger output cuts would lead rivals in Opec to increase supply.
Five people briefed on Saudi Arabia’s thinking said Brent crude’s more than 10 per cent slide in the past week, dipping below $40 a barrel on Tuesday, was causing concern but not yet panic in Riyadh. The kingdom has led Opec and other producers such as Russia, known together as Opec+, in slashing output in the face of the coronavirus pandemic.
The country fears that if it cuts more output to support prices, other countries will take advantage and produce greater amounts, jeopardising the unity of the Opec+ group that enacted record supply cuts in April as demand collapsed.
“[Saudi Arabia] is not seeing much of a concern yet”, said one of these people, who added there was not a need for a “bigger cut” at this point. “All the issues we see today are about sentiment.”
Traders are growing increasingly anxious about the pandemic’s longer-lasting impact on oil consumption, while reported production from certain Opec countries such as the UAE, Iraq and Nigeria in recent months has been higher than stipulated under the Opec+ deal.
Saudi Arabia believes that the market sell-off in recent days has been exacerbated by the turmoil in equity markets and the strengthening of the US dollar, said several people.
Brent crude oil recovered from below $20 a barrel in April to a six-month high near $46 a barrel in August, as the cuts took effect and demand picked up after government lockdowns eased.
But signs of renewed demand weakness in the US and India, and slower crude imports by China, have combined with a rise in coronavirus cases elsewhere to spark fears that the oil market’s recovery has stalled.
Global oil demand is still down by almost 10 per cent year-on-year, as many economies are mired in recession and car and airline travel remain depressed.
Saudi Arabia agreed a US-backed deal in April with global producers to slice 9.7m barrels a day off global supply. They tapered the cuts in August to 7.7m b/d, or about 8 per cent of global demand.
Saudi Arabia’s position has been complicated by higher than agreed supply from the UAE, its main Gulf ally, which has surprised traders by its lack of compliance with the deal.
Riyadh has publicly put pressure on Opec members Iraq and Nigeria to comply with their own promises, given their history of weak compliance with production targets. The kingdom fears the UAE’s overproduction is undermining that stance.
Iraq, Nigeria and the UAE have said they will compensate for their earlier overproduction by cutting additional barrels in the coming months. Saudi Arabia does not want to undermine these undertakings by backing further cuts at this stage, according to people briefed on the matter.
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Brent had recovered some ground to trade at $40.75 per barrel by late afternoon on Wednesday in London.
Anas Alhajji, an adviser to oil-producing governments, said that asking for additional cuts would “complicate Opec’s dynamic”.
“How do you convince countries that are already struggling to make additional cuts to make even deeper ones? It is in everyone’s interest for Opec+ to stay the course.”