Saudis Weigh Large Oil Cuts in Response to Coronavirus, Prices Resume Decline -- 3rd Update

Saudi Arabia is pushing for a major short-term oil production cut as it seeks to respond to the impact of China's deadly coronavirus on crude demand, according to OPEC officials.

The health crisis is impacting faraway oil-exporting nations, as reduced refining demand hits the prices they can charge for crude, and their revenues.

Representatives of the Organization of the Petroleum Exporting Countries and its allies are set to meet Tuesday and Wednesday to debate possible action after the outbreak originating in China, the world's largest oil consumer, contributed to a sharp drop in crude prices. The group could then make a decision to reduce output at a possible meeting next week, OPEC officials said.

Under one scenario, the kingdom would lead a collective reduction of 500,000 barrels a day that would stand until the crisis is over, the OPEC officials said. That would add to curbs of the same amounts agreed in December and bring the restrictions to 2.2 million barrels a day.

Another option under consideration would involve a temporary cut of 1 million barrels a day by the Saudis, aimed at creating a shock in oil markets, the officials said. The kingdom currently produces around 9.7 million barrels a day.

Oil prices rose briefly on the news of the Saudi proposal in early trading, but resumed their tumble by late Monday morning. Global and U.S. prices are close to finishing the session in bear-market territory, generally defined as a 20% decline from a recent peak.

Brent crude, the main international price, traded 2.4% lower at $55.25 after being down more than 3.5% earlier in the day. West Texas Intermediate, the U.S. price gauge, briefly traded below $50 a barrel for the first time in more than a year, and were recently at $50.74, down 1.6%.

A cut of "500,000 barrels is far from enough but it's typically good for OPEC to be involved with tactical cuts," said Bjarne Schieldrop, an analyst with Sweden's SEB Markets. "The first numbers out of China show losses to demand of 3 million barrels a day and the extent of the virus is still unfolding. We're nowhere near stabilization."

Vienna-based energy consulting firm JBC cut its forecasts Monday for China's oil consumption by 1 million barrels a day in February and March, amid signs refiners in the country have reduced their oil intake. Prospects of weakening demand contributed to a 15% decline in oil prices in January.

Saudi officials fear that mounting oil revenue losses threaten their efforts to diversify their economy. The kingdom -- whose largest oil buyer is China -- relies on high oil prices to fund new projects in tourism, real estate or petrochemicals. While Saudi Arabia's expenditure fell this year by 2.6% to 1.02 trillion riyals ($272 billion), it requires oil prices way above $60 a barrel to balance its budget.

In January, the International Monetary Fund downgraded Saudi Arabia's economic growth forecast for 2020 by 0.3 percentage points to 1.9%, amid concerns that OPEC's previously agreed production cuts would have little impact on oil prices.

December's initial public offering of state-run Saudi Arabian Oil Co., known as Aramco, was seen by Saudis as the most prominent symbol of attempts to diversify the national economy. Since Jan. 9, however, Aramco's shares have lost 3.3%.

Representatives from OPEC and 10 allied nations led by Russia will hold a technical meeting this week to access the virus' impact and make recommendations to members. While the Saudis would carry the brunt of any cuts, collective responses by oil producers tend to be more efficient in supporting prices.

The representatives are likely to decide on a broader gathering of the alliance's 23 producers in Vienna on Feb. 14-15, the OPEC officials said, replacing a conference planned for early March.

Iran, which had initially objected to an emergency meeting, is open to a mid-February summit, Iranian oil minister Bijan Zanganeh said Monday, according to Iran's state-controlled news agency IRNA.

Write to Summer Said at and Benoit Faucon at

  (END) Dow Jones Newswires
  02-03-20 1328ET
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