Saudi energy minister Prince Abdulaziz bin Salman, left, and Russian Energy Minister Alexander Novak at a meeting in Vienna on Dec. 6, 2019.
Photo: leonhard foeger/ReutersSaudi Arabia is considering a break from its four-year oil production alliance with Russia, as China’s coronavirus outbreak contributes to a drop in global oil demand, according to people familiar with the matter.
The Saudi kingdom, Kuwait and the United Arab Emirates—which collectively represent over half of OPEC’s production capacity—are holding talks this week to discuss a possible joint output cut of as much as 300,000 barrels a day, said the people.
The coronavirus outbreak has created a rift in the partnership between the Saudi-led Organization of the Petroleum Exporting Countries and Russia. The two sides have collaborated since December 2016, attempting to balance global oil supply amid a surge of crude from U.S. shale producers. If the Saudis, Kuwait and the U.A.E. break with the Russians, the split could further weaken OPEC’s ability to influence oil prices.
The new tensions come ahead of the group’s early March gathering in Vienna, where it aims to reach a consensus on how much crude to deliver to an already oversupplied market.
At an emergency meeting earlier in February, Russia rejected a Saudi push to deepen the alliance’s existing oil production curbs by 600,000 barrels a day.
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Russian officials still don’t see a need for reductions, the people familiar with the matter said. Russian delegates say that business activity in China is recovering and the impact of the virus on oil demand is limited, the people said.
Saudi exports to China have remained stable since the crisis began, though sales from other OPEC members have shown weakness, according to commodities-data provider Kpler.
Saudi energy minister Prince Abdulaziz bin Salman has compared the virus’s effect on oil demand to a fire that needs to be put out, according to a person familiar with the matter. In one option under consideration, Saudi Arabia and its two Persian Gulf neighbors would reduce production without coordinating with a group of 10 non-OPEC nations led by Russia.
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The divergence of opinion over coronavirus’s effect on oil demand goes beyond OPEC. The International Energy Agency warned Feb. 13 that demand for oil is likely to be 435,000 barrels a day less in the current quarter compared with a year ago. Vitol Group, the world’s largest independent oil trader, is more pessimistic, expecting that quarterly demand will fall by around 2.2 million barrels a day. Under either scenario, a quarterly decline would be the first since the height of the global financial crisis.
However, Moscow says that weakened demand will be offset by reduced supply resulting from Libya’s oil shutdown and new sanctions targeting Venezuela’s crude sales, one person familiar with the matter said.
Libya’s oil output has fallen to 120,000 barrels a day from 1.2 million daily barrels since a renegade general shut pipelines and oil ports in January in a dispute with the central government.
The U.S. sanctioned Tuesday a subsidiary of Russian state-run company Rosneft Oil Co. that had become the main marketer of banned Venezuelan crude. The new restrictions could cut Venezuelan exports by 600,000 barrels a day, said energy consulting firm FGE, which sees the market tightening by June as a result of the Libyan and Venezuelan disruptions.
“Russia’s arguments for doing nothing may have some validity,” it said.
— Sarah McFarlane contributed to this article.
Write to Summer Said at summer.said@wsj.com and Benoit Faucon at benoit.faucon@wsj.com
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