Saudi Arabia deepens oil cuts as prices hit by weak demand

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DUBAI / LONDON (Reuters) – Saudi Arabia will voluntarily deepen oil production cuts from June, as falling crude prices cause tremendous damage to the kingdom’s budget and global demand remains weak as a result of public isolation measures aimed at containing the Corona pandemic.

Saudi Aramco logo – Image from Reuters archive.

The kingdom’s announcement to add one million barrels per day, or one percent of global supply, to the cuts previously announced comes in the wake of a phone conversation last week between US President Donald Trump and Saudi King Salman.

Trump last month persuaded Saudi Arabia and other OPEC members and Russia, as part of what is known as the OPEC + group, to cut oil production after a collapse in crude prices and put heavy pressure on US producers.

Last Friday, the two men discussed oil and defense, amid reports that Washington would withdraw two Patriot missile batteries from Saudi Arabia that were deployed to deter Iran. Washington said the clouds were not linked to oil.

A Saudi Energy Ministry official said on Monday that the new cuts would reduce Saudi total production by about 4.8 million barrels per day in June compared to April. Consequently, production will be at 7.492 million barrels per day, which will be the lowest level in almost two decades.

“Through this additional reduction, the kingdom aims to encourage OPEC + participants, as well as other producing countries, to comply with the production cuts that they have undertaken, 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 new cuts in oil production by 80,000 bpd in June, in addition to those agreed upon under the OPEC + plan.

* “Agreement with Trump”

Global demand for oil plummeted by 30 percent, as the Corona virus pandemic inhibited travel and economic activity around the world, causing stocks to accumulate globally.

OPEC + agreed last month to cut production by 9.7 million barrels per day in May and June, which is an unprecedented reduction in production.

Producers will slowly loosen restrictions after June, although supply cuts will remain in place until April 2022.

Christian Malek, managing director of JP Morgan, said he expected Saudi Arabia to deepen the cuts further, perhaps between one million barrels per day and another 1.5 million barrels per day under pressure from Trump and its financial pressure at home.

Saudi Arabia said on Monday that it will raise the value-added tax three times and suspend the cost of living for state employees.

Malik said, “It is a temporary cut to help mitigate the impact of demand damage in the next few months. It also appears to have been politically motivated to meet an agreement with Trump … the US energy sector is looking to bail out from Saudi Arabia.

He added that the Kingdom is looking, in return, for American investments and the elimination of legislation against OPEC.

“But looking after 12 to 18 months, Saudi Arabia will have a greater market share, while the major oil producers and shale oil sector will be hit hard,” he said.

Dmitry Jidanikov covered the coverage – prepared by Mahmoud Salama for the Arab Bulletin – edited by Wajdi Al-Alfi





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