BAKU, Azerbaijan, March 2
By Leman Zeynalova - Trend:
Saudis are expected to keep oil production low, to help manage market, Trend reports citing Fitch Solutions Country Risk and Industry Research (a unit of Fitch Group).
“We have made a further downgrade to our crude production forecast for Saudi Arabia this quarter, to reflect deeper cuts enacted in response to the outbreak of Covid-19. We now forecast a 0.8 percent decline in output, compared to our previous forecast for flat production year-on-year,” said the company in its report.
Fitch Solutions noted that at the OPEC meeting in December 2019, Saudi Arabia committed to cut supply by an additional 167,000 barrels per day under the OPEC+ production cut agreement, bringing its total 489,000 barrels per day.
“In addition to this, the kingdom pledged to overcomply with the cut by a further 400,000 barrels per day. Our forecast assumes that the kingdom delivers fully on its commitments under the deal and that the deal remains in place until the end of the year. It also allows for a small degree of overcompliance in H120, assuming moderately stronger production in the second half of the year. The oil market is loose and prices are being damaged by both a fall in demand and fragile investor sentiment. Against this backdrop, we assume Saudi Arabia will keep its production low, to help manage the market,” reads the report.
Fitch Solutions predicts that action by OPEC+ at its meeting on March 5-6 would trigger further downward revisions.
“The group's technical committee has recommended that the deal be rolled over beyond the end of Q1 and that additional cuts be made in response to the coronavirus. Based on the committee's recommendation of a 600,000 barrels per day cut (to be held in place through June), this would imply around a 150,000 barrels per day cut be made by Saudi Arabia, if calculated on a pro rata basis,” the report says.
As Fitch Solutions said, historically, Saudi Arabia has tended to take an outsize role in any action by the group, so curtailment above this level could reasonably be expected.
“However, while the kingdom is in favour of a cut, a broad consensus within the group will be hard to build. The cut made in January 2020 (500,000b/d) was small in comparison to the cuts made in both January 2017 (1.8mn b/d) and January 2019 (1.2mn b/d) and, at three months, its duration was the shortest. Saudi Arabia vastly over-committed itself, while Russia - which had expressed reluctance to lower its output further - was allowed to exclude condensates production from its quota, as a means to sweeten the deal.”
Taken together, this would suggest that the kingdom encountered some significant difficulties in securing the agreement, said Fitch Solutions.
“Russia has yet to voice its support for the technical committee's new recommendations in regards the coronavirus and reports are surfacing of divisions between Moscow and Riyadh over OPEC+ policy. However, the renewed downturn in Brent and indications of a wider spread of the virus outside of China will add impetus for the group to act.”
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