Saudi Aramco has again delayed the release of its monthly oil-pricing schedule pending discussions around a possible coordinated production cut to help put a floor under a market which, until Donald Trump’s bombastic “deal” proclamations late last week, was in free fall.
Official selling prices for May will now be released on April 9. They were scheduled to be out Sunday.
The emergency OPEC+ meeting, originally set for Monday, is now tentatively scheduled for Thursday. The diplomatic process was jeopardized over the weekend after abrasive comments from the Saudis. Riyadh was irritated by a series of blatantly false claims Vladimir Putin made Friday, and responded in kind.
The proposed production cut would mark the largest coordinated output reduction on record, but no market watcher that I’m aware of believes it will be enough in the face of the biggest demand shock in modern history.
Still, producers have to act. Inland production is on the verge of being shut-in, and the deleterious ripple effects of collapsing prices will soon be felt on the fiscal side. Trump was at least partially correct on Friday when he mused that one way or another, cuts are coming.
“Ultimately the marketplace will take care of it”, the US president remarked, after a meeting with US producers. That’s true – one assumes that as storage fills up, there will be no choice but to cut. And yet, nobody really wants to push the envelope that far.
Apparently, Norway is prepared to help too, if necessary. The country hasn’t participated in production cuts in 18 years.
Aramco’s decision to delay the release of OSPs for May sets up another potentially dramatic situation if no deal is reached. On March 7, after a similar delay to account for ongoing negotiations with Russia in Vienna, Aramco announced huge OSP cuts for April, effectively firing the first “live round” (if you will) in the price war.
That day, Aramco increased the discount for Arab Light to refiners in Europe by $8 a barrel, around $10.25 below the Brent benchmark at the time.
That undercut Russia’s flagship blend by a hilarious ~$6, an effort to effectively cut the Russians out of the European market. In addition to the cuts for European refiners, Aramco slashed all official selling prices for Asia and all pricing to the US.
Seen in that light, one could well view the OSP announcement delay as a threat – either Russia gets on board by Thursday, or else. A more conventional read, from Bloomberg, is that “the delay could be interpreted as an effort to put the global price war on hold and give countries more room to negotiate reductions in output”.
Considering the collapse in demand, Aramco had been expected to cut May pricing for Arab Light to Asia by between $3.50 and $3.75 per barrel, making it the cheapest in 20 years of Bloomberg data.
Lower crude prices put pressure on the kingdom’s finances, which should be squeezed further by measures to assist those hardest hit by the virus. The government is incentivizing business owners to avoid layoffs by offering to pay up to 60% of worker salaries for the next three months.
Some estimates have Riyadh running a deficit of more than 20% of GDP in 2020 assuming Brent dives to $20.
Clearly, Mohammed bin Salman will need to scale back his ambitions for “Vision 2030”. It’s highly unlikely the money for the myriad associated projects will be available considering plunging crude prices and the economic impact globally from the pandemic.
Meanwhile, the whole economy PMI for Saudi Arabia came in at 42.4 for March, IHS Markit said Sunday.
That’s the lowest on record and represents a dramatic plunge from 52.5 in February.
“The Saudi Arabia PMI hit a survey-record low amid emergency public health measures to halt spread of coronavirus in March”, IHS Markit’s Tim Moore said, adding that “the latest survey data were collected between 12-23 March and therefore signal a steep economic downturn even before the tightening of workplace and travel restrictions to contain the COVID-19 pandemic”.