Saudi Arabia expected to ramp up oil production after Opec+ pact falters

The world's largest oil exporter slashed its prices for its flagship crude grade following collapse of talks with Russia

epa07989048 Visitors gather at Saudi's Aramco section during Abu Dhabi International Petroleum Exhibition and Conference (ADIPEC) in Abu Dhabi, United Arab Emirates, 11 November 2019. ADIPEC, a meeting place of the international oil and gas community, runs between 11 and 15 November 2019.  EPA/ALI HAIDER

Saudi Arabia is expected to significantly ramp up production and will offer discounts to buyers after Russia walked away from a deal to curb output to bolster prices.

Saudi Aramco, the country's state-backed oil producer, issued a guidance to the market that it would reduce its selling price to Asia by $4 to $6 a barrel, much higher than the cut of $2 a barrel expected by analysts, prior to the Opec meeting in Vienna last week.

The discount on Aramco's Arab Light crude grade for Asian buyers are the steepest and indicate that the kingdom plans to raise its production to capture more market share in competition with erstwhile ally Russia.

Saudi Arabia also lowered the price of its crude grade for customers in the US, Europe as well as the Mediterranean by up to $7 to $8 a barrel.

The move is a major turnaround for the world's largest oil exporter, which until last week volunteered larger production cuts in order to help draw down global inventories and prop up prices.

"Saudi Arabia sacrificed more than its fair share of the combined production cuts through the three years, while Russia got away with less than 100 per cent compliance with its pledged cuts," said Vandana Hari, founder and chief executive at Vanda Insights based in Singapore. "The virus appears to have pushed the Saudis to the brink and into a high-stakes gamble," she added.

The pact between the alliance known as Opec+ reduced oil production by 1.7 million barrels a day from January, with Saudi Arabia volunteering an additional 400,000 bpd to counter the markets roiled by the impact of the US-China trade war last year.

During the Opec+ meeting last week, Saudi Arabia pushed for deeper cuts of 1.5 million bpd to counter the depression in demand due to the coronavirus. However, Russia, said to be sceptical about the full impact of the outbreak, did not agree with Opec's recommendation of an additional cut of 500,000 bpd from non-member producers of the alliance.

Riyadh could now boost production by as much as 10 to 10.5 million bpd next month, following the expiration of the Opec+ pact at the end of April, said David Fyfe, chief economist at Argus.

“But there is no guarantee [Saudi Arabia] would want to flood the market for long if demand is already being hammered by the economic impacts of the virus,” he said.

The kingdom needs higher oil revenues to plug its expected budget of around $50 billion this year, he added, with prices expected to slide further over the coming weeks.

“Given the weak economic backdrop this time, the fact that prices are starting from a lower level and the fact that production costs among non-Opec suppliers have fallen substantially, were all-out price war to take place, then it is easy to see quarterly average prices falling well below $30 per barrel,” said Mr Fyfe.

Some analysts forecast a recession for countries such as Germany and Italy as a result of the spreading virus and its disruption of global trade, business and supply chains.

Oil prices plunged 10 per cent on Friday after the breakdown of talks between Opec+ alliance members. The group of 24 oil-producing countries (14 members of Opec and 10 non-Opec members) was forged in late 2016 to counter the rising tide of US shale.

Brent futures settled at $45.27 per barrel on Friday, the lowest since 2017, while West Texas Intermediate, which largely tracks North American crude grades, settled at $41.28 per barrel.

Reverberations of the collapse of the Opec deal were clear on Sunday when markets in the Middle East opened for trading. The Dubai Financial Market had slipped 7.9 per cent and the Abu Dhabi index was 4.1 per cent lower by 12.25pm UAE time on Sunday. Almost all sectors were hit, with blue-chip stocks like Emirates NBD trading 9.6 per cent lower and Emaar Properties was 8.6 per cent lower. Saudi Arabia's Tadawul All-Share Index was down 7.5 per cent, with Saudi Aramco’s shares falling 6.2 per cent, and the Kuwait Premier index was 9 per cent lower.