OPEC+ rolled out the red carpet for China’s senior Vienna-based diplomat on Tuesday, as the oil cartel looked to safeguard long-term relations with its beleaguered top client amid a global health emergency.
The Saudi- and Russian-led bloc was to determine on Wednesday whether to enact fresh production cuts of up to 1 million barrels per day to make up for a potential prolonged drop-off in Chinese demand.
Speaking to reporters on the sidelines of the OPEC+ meeting, Chinese Ambassador to International Organizations Wang Qun urged calm.
“Overreactions will lead to unnecessary disturbances on the market, on the oil market, on the economic market,” the diplomat was quoted by S&P Platts as telling reporters.
But for the Organization of the Petroleum Exporting Countries’ kingpin Saudi Arabia, the drop in oil prices to the mid-$50s per barrel is cause for major concern.
China buys more than 70% of its crude from OPEC and its Russian-led allies, “making demand destruction caused by the virus critical for the coalition,” said energy research publication S&P Platts.
It added: “Oil prices have fallen by a fifth since the outbreak first emerged,” meaning they have fallen into what is known as bear-market territory.
OPEC+ had already been cutting output to shore up crude prices well before the coronavirus outbreak, points out Baghdad-based geopolitical analyst Noam Raydan.
“But now the coronavirus has added new problems. And whatever production cut they might agree on will be related to oil prices, of course; current status of oil demand [because of what China is going through]; and, of course, the members’ budgets – and by this I mean the members that heavily rely on oil revenues will need strong oil prices,” she told Asia Times.
Those members include Saudi Arabia and Iraq.
Calling for cuts
Iran and Saudi Arabia, normally rivals, are expected to make common cause on oil-production cuts, as both look to suffer from a protracted slump in Chinese demand.
“The Chinese are going to be obviously importing somewhat less oil in the short term,” said James Dorsey, senior fellow at Singapore’s S Rajaratnam School of International Studies and Middle East Center. “It’s too early to say what the long term is, but lower growth means lower consumption. “
Reuters reported on Monday that the Chinese company Sinopec, the continent’s largest refiner, instructed facilities to “cut throughput this month by around 600,000 barrels per day.”
Lower demand from Beijing, Dorsey notes, will hurt Iran more than Saudi Arabia. Although Chinese oil imports from Iran have been dampened by US sanctions, the limited amount Iran has been able to sell is important. And so is maintaining the price per barrel.
Iranian Petroleum Minister Bijan Zangeneh told state media on Monday that Iran would only agree to bump up a March 5 OPEC meeting this month if fellow members were united on reducing output.
“The Iranians have less wiggle room,” Dorsey told Asia Times. “They’re gonna try to sell as much as they can. And they’ve already been forced to sell below market price.”
For Saudi Arabia’s crown prince, who was counting on oil profits to fund his plans for Vision 2030 economic diversification, depressed oil prices are highly undesirable.
“Saudi needs the money, too, given its budget requirements. They already have a budget deficit,” said Dorsey. “They do have some reserves. It’s not like they’re about to go broke, but they have ambitious targets, and they have high costs.”
Saudi King Salman phoned Russian President Vladimir Putin on Tuesday night, in what analysts suspect was a bid to get Moscow on board with deeper production cuts.
When OPEC+ meets on Wednesday, all eyes will be on Russia, the gatekeeper to any production cut.