Saudi-Russian Alliance Is Strained as Coronavirus Saps Demand for Oil

Saudi-Russian Alliance Is Strained as Coronavirus Saps Demand for Oil

An alliance between Saudi Arabia and Russia has helped prop up oil prices for the last three years. But the two big oil producers were not in perfect harmony this week, as they have tried to recalibrate production targets to cope with reduced demand from China, whose economy has been crippled by the coronavirus epidemic.

Saudi Arabia’s oil minister, Abdulaziz bin Salman, wanted to move ahead quickly with a meeting to consider new production cuts, but he has struggled to persuade Moscow, even after his father, King Salman, made a call to President Vladimir V. Putin of Russia on Monday.

Instead, the Organization of the Petroleum Exporting Countries this week convened three long days of meetings of a technical group that produced a recommendation to cut output by 600,000 barrels, an almost 30 percent addition to curbs agreed upon in December but probably less than the Saudis wanted, according to some analysts.

Still, Russia’s representatives told the group that while they found the recommendations reasonable they needed more time to consider them, according to a person briefed on the matter.

The inability to reach a quick consensus inevitably raised concerns about whether Saudi Arabia, the de facto leader of OPEC, and Russia were still able to work together to coordinate oil policy.

“The real question is whether the Russians and the Saudis are on the same page on the necessity for collective action,” said Helima Croft, head of global commodity strategy at RBC Capital Markets, an investment bank, who monitored the meeting in the OPEC press room.

Ms. Croft speculated that Russia might be “slow-walking” on cuts, though she figures that Moscow will come around in time.

Still, the fact that meetings did occur, and the prospect that further cuts might be on the way, was enough to at least temporarily halt what had been a steep fall in oil prices since the outbreak of the coronavirus, which has now killed more than 600 people in China. Brent crude, the international benchmark which exceeded $70 a barrel in early January, was trading at about $55 a barrel on Friday.

In an interview, Bjornar Tonhaugen, head of oil market research at Rystad Energy, a research firm, said the 600,000-barrel-a-day cut being discussed was “quite a reasonable number.”

  • Updated Feb. 5, 2020

    • Where has the virus spread?
      You can track its movement with this map.
    • How is the United States being affected?
      There have been at least a dozen cases. American citizens and permanent residents who fly to the United States from China are now subject to a two-week quarantine.
    • What if I’m traveling?
      Several countries, including the United States, have discouraged travel to China, and several airlines have canceled flights. Many travelers have been left in limbo while looking to change or cancel bookings.
    • How do I keep myself and others safe?
      Washing your hands is the most important thing you can do.

As OPEC ponders what to do, it faces a difficult calculation. The degree of impact that the coronavirus outbreak will have on demand for oil is not yet known, though it is expected to be substantial. Several Chinese cities have been seemingly shut down, with some factories idled and flights canceled.

The curtailment of economic activity will result in a major reduction of energy consumption — a huge concern for OPEC because China is the world’s largest energy importer and a key customer. Wood Mackenzie, a market research firm, figures that oil demand for the first three months of this year will be slashed by about 900,000 barrels a day or nearly 1 percent of global consumption.

The effects of reduced energy use are already being seen in the market for liquefied natural gas, a chilled fuel used in industry and power generation.

Rystad Energy estimates that Chinese imports of liquefied natural gas fell 10 percent in January from a year earlier. Analysts say that with customers not needing as much fuel as they thought, Chinese buyers are trying to stop or reschedule shipments with some of them going to the extreme option of declaring force majeure — a legal term for unforeseen circumstances that invalidate a contract.

Total, the French oil company, said it had recently rejected a force majeure claim by a Chinese buyer of liquefied natural gas. Analysts say the situation is likely to worsen, as vessels laden with gas are forced to go elsewhere — all while the liquefied natural gas market is already amply supplied and prices are at rock bottom.

“There is clearly a major issue in China with its ability to take L.N.G.,” said Frank Harris, head of liquefied natural gas consulting at Wood Mackenzie.

In the oil market, there are offsetting factors. The output of the Libyan oil industry is down by about one million barrels a day, or about 1 percent of world demand, because of political turmoil. While it is widely assumed that Libyan oil will come back on the market soon, no one is certain when that will be.

With the oil industry just beginning to come to terms with the implications of the coronavirus, there is an argument for waiting until the next OPEC meeting, scheduled for early March, to make decisions.

“I don’t know why the urgency,” said Bill Farren-Price, director of intelligence at RS Energy group, a market research firm. “It looks slightly panicky to me.”

Whether the split between Russia and the Saudis will widen will become clear only over time, but some analysts say Russia has good reason to continue to coordinate policy with OPEC.

Analysts say Mr. Putin benefits from playing along with the Saudis. Working with OPEC gives Russia a seat at the table at which many of the world’s largest oil producers negotiate output decisions that have an impact on prices.

Ties to the Saudis also fit with Mr. Putin’s efforts to expand Russia’s influence in the Middle East, in countries like Syria and Iraq, as well as in Libya. A web of business relationships is forming between Russian companies and Riyadh and its allies like Abu Dhabi, where Lukoil recently became the first Russian firm to gain participation in natural gas production.

The Russians “seem to be content to be part of this coalition and maintain this political role even if their implementation of cuts is very limited,” Mr. Farren-Price said.

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