International

Pressure mounts on Saudi Arabia to finalise oil deal

Published on : 2020-04-12


FT - Pressure mounted on Saudi Arabia on Saturday to finalise the biggest oil supply deal in history, as the coronavirus pandemic wreaks havoc on the global energy sector.


The agreement, to remove 10m barrels a day or more of global supply, has won the support of Opec and Russia and the G20 group of nations, with US President Donald Trump becoming the unlikely champion of a deal to support oil prices.


But despite winning broad backing over two days of talks, getting the deal over the finish line has become fraught after Mexico — a relatively small oil producer — defied Saudi Arabia’s push to have all members of the Opec+ alliance cut output by an equal margin. 



Saudi Arabia’s reticence to sign up without Mexico’s full co-operation threatens to damage its relationship with the US, which has said it could place tariffs on the kingdom’s oil sales if it fails to make a deal. That would be a significant blow to one of the pillars of the US-Saudi relationship.


Failure to reach an agreement risks sending oil prices even lower when trading reopens after the Easter weekend. The market is already creaking under the weight of record oversupply, as lockdowns and the economic fallout from the coronavirus pandemic have slashed oil consumption by as much as a third.


Millions of energy jobs worldwide are under threat, the International Energy Agency has said, while long-term supplies could be damaged.


Brent crude has recovered to around $30 a barrel since Mr Trump announced a deal was in the works, bouncing from an 18-year low near $20 a barrel, though it remains down by more than half since March. 


Dmitry Peskov, a spokesman for Russian president Vladimir Putin, said on Saturday he believed the deal was “an unconditional success” and added that he hoped Mexico’s “deferred agreement” would soon be resolved.


In a statement in the early hours of Saturday morning the G20 energy ministers called on the world’s leading countries to take “all the necessary and immediate measures to ensure energy market stability” and recognised the “commitment” of some producers to cut output.



The Opec+ group wants other oil producers — such as the US, Norway, Brazil and Canada — to make contributions such as cutting investment in oil production and buying up crude for strategic reserves that could bolster the production cut.


 Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman — half-brother of Crown Prince Mohammed bin Salman — has not commented publicly on the deal since Friday morning, but has long insisted there can be no free-riders within the Opec+ group.


Russia’s reluctance to deepen production cuts in line with other members last month prompted Saudi Arabia to start a price war.


A senior Saudi official said he believed a deal would still be reached, but insisted there be no exemptions, despite Mexico’s wish to make a smaller contribution to the cuts. “We will have an agreement,” they said. “It’s very important that we don’t provide an exemption like this [to Mexico] because everybody will ask for one.”


The kingdom faces growing pressure as Mr Trump has gone out on a limb to support a deal, despite longtime opposition in the US to the Opec cartel, which has frequently been blamed for raising petrol prices for motorists.


Even as Mr Trump said this week he once “hated” Opec, he conceded the needed to support joint action as the oil crash threatened the high-cost US shale industry, which has transformed the country into the world’s largest oil producer in the past decade.


Mr Trump has stopped short of mandating US production cuts. But energy secretary Dan Brouillette said on Friday that output in the country is expected to fall by 2m barrels a day, or by more than 10 per cent in the coming months due to the drop in prices.


The US president has been in contact with Saudi Arabia’s Prince Mohammed and Russia’s President Putin, with the oil deal becoming a diplomatic dance between the world’s three largest producers. Mr Trump has addressed the issue almost nightly at his televised coronavirus briefings.


On Saturday, US senators from oil-producing states held a conference call with Saudi officials including the oil minister to urge the kingdom to swiftly follow through with its cuts. Senator Kevin Cramer of North Dakota said on Twitter after the call that the kingdom’s moves to launch a price war “were inexcusable and won’t be forgotten”. He added: “Saudi Arabia’s next steps will determine whether our strategic partnership is salvageable.”


The US would “not only re-evaluate, but take actions that will start to undermine the long term relationship that many of us have supported”, Senator Dan Sullivan of Alaska told the network. 


“The pressure from the US is way too much for Saudi Arabia not to do a deal,” said Amrita Sen at consultancy Energy Aspects.


After Mexico offered Opec+ a cut of just 100,000 b/d, not the 400,000 b/d demanded by the kingdom, Mr Trump even said the US could “pick up some of the slack” for Mexico.


Talks among producers continued on Saturday to enable a workaround, with most analysts expressing confidence the deal would soon be signed, given Mexico’s disputed production amounts to less than 3 per cent of the total under consideration.


Mohammed Barkindo, Opec’s secretary-general, was negotiating on Saturday with Mexico to find a breakthrough, said people familiar with the matter.


While Saudi Arabia would almost certainly seek to blame Mexico in the event talks collapsed, the other members of Opec+ appeared keen to move on from the squabble, leaving Saudi Arabia increasingly isolated.


One of the kingdom’s closest allies, the UAE’s oil minister Suhail Al Mazrouei said on Twitter the country would “help balancing the oil supply and demand, while the world is united to fight Covid-19”.


Opec, where Saudi Arabia is seen as de facto leader, released a statement from the African Petroleum Producers Organization supporting the deal, describing it as “a significant step in halting the speed at which the global oil industry was heading for total collapse”.


APPO said its members outside Opec+ would also commit additional supply cuts to the deal.


The kingdom has delayed the release of its monthly selling prices until Sunday, a sign it is wielding them as a threat in negotiations. Last month it used the normally routine announcement to offer huge discounts, firing the first shot in the price war with Russia that has exacerbated oil’s collapse.


Walking away from the deal would indicate Saudi Arabia might never have been keen on cutting production in the first place, analysts suggested, believing it is better-placed to weather the price slump and emerge with a bigger share of the market due to its low cost of production.


Yet all oil economies are suffering with their government budgets now under huge pressure. 


The 10m b/d of Opec+ cuts, once finalised, would stay in place for May and June, with Saudi Arabia and Russia shouldering half of that amount between them. The curbs would decline to 8m b/d until the end of the year and then 6m b/d between January 2021 and April 2022, according to the proposed deal.


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