Saudi Arabia to Reduce Oil Production Further

May 11, 2020

Illustration only - Credit:look_67 / AdobeStock
Illustration only - Credit:look_67 / AdobeStock

Saudi Arabia will voluntarily deepen oil output cuts from June as low oil prices are causing huge pain to the kingdom's budget and global demand remains weak due to lockdowns to contain the coronavirus pandemic.

The announcement by the kingdom to add 1 million barrels per day (bpd) - equal to 1% of global supply - to the previously announced cuts follows last week's phone conversation between U.S. President Donald Trump and Saudi Arabia's King Salman.

Trump had worked last month to persuade Saudi Arabia, fellow OPEC members and Russia - a group known as OPEC+ - to cut oil output after a collapse in crude prices put heavy pressure on U.S. producers.

Last Friday, the two men discussed oil and defense amid news Washington would withdraw two Patriot anti-missile batteries from Saudi Arabia that have been a defense against Iran. Washington said the withdrawal was not linked to oil.

On Monday, a Saudi energy ministry official said new cuts would bring total Saudi production down by around 4.8 million bpd in June versus April.

Output would then stand at 7.492 million bpd, the lowest in almost two decades.

"The Kingdom aims through this additional cut to encourage OPEC+ participants, as well as other producing countries, to comply with the production cuts they have committed to, and to provide additional voluntary cuts, in an effort to support the stability of global oil markets," the Saudi official said.

Kuwait joined Saudi Arabia in announcing fresh oil production cuts of 80,000 bpd in June, on top of those already agreed under the OPEC+ plan.

Oil prices rose on the announcements, with the benchmark Brent and WTI futures paring earlier losses to trade at $31 a barrel and $25.12 a barrel respectively.

'DEAL WITH TRUMP'

Global oil demand has slumped by about 30% as the coronavirus pandemic has curtailed travel and economic activity across the world, building up inventories globally.

OPEC+ agreed last month to reduce output by 9.7 million bpd for May and June, a record production cut.

Producers will slowly relax curbs after June, although reductions in supply will stay in place until April 2022.

Christyan Malek, managing director at J.P. Morgan, said he expected Saudi Arabia to further deepen cuts, possibly by another 1.0-1.5 million bpd, under pressure from Trump and its own fiscal pressures at home.

On Monday, Saudi Arabia said it would triple value-added tax and suspend a cost of living allowance for state workers.

"It is a transitory cut to help soften the demand hit in the next few months. It also does appear to be a politically charged cut to meet a deal with Trump," Malek said. "The U.S. energy industry is looking for a bailout from Saudi Arabia."

The kingdom was, in turn, looking for U.S. investments and the removal of anti-OPEC legislation, Malek said.

"But fast forward 12-18 months and Saudi Arabia will have a bigger market share while oil majors and shale will be severely hit," he added. 

(Reporting by Rania El Gamal, additional reporting by Dmitry Zhdannikov; editing by David Evans and Mark Potter)

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