The heated discussions on the outcome of the upcoming OPEC meeting in Vienna in two weeks should be taken with a grain of salt. Even that possible rifts are expected, due to the internal strife with Iran, Venezuela and Qatar, the overall picture should be decided on fundamentals. The Saudi oil production strategy should be based on these presumptions. At the same time, Russian officials are supporting some of the doubts and worries in the media. Current statements made by Russian oil companies’ officials could indicate a rift within the country’s energy elite with regards to the future of the Russia-OPEC (ROPEC) deal.
Outsider USA, via twitter messages of president Donald Trump, also entered the fray with, accusing ROPEC of keeping prices high and hurting consumers. Trump’s tweets and internal OPEC conflict have resulted in a global oil market looking for direction. Some volatility in the market has been seen already, even that the effects have been short-lived. Financial analysts and oil market pundits are however still worried that global oil market will be flooded again.
Saudi Arabia, the current King-maker of the ROPEC production cut deal, is still keeping its mouth shut. Saudi figures the last days have indicated that the Kingdom has slightly opened its taps, showing an production increase of around 100,000bpd. The latter could be a reaction, or a fig leaf, to Trump, and some of its Asian clients. China and India have been actively asking Arab producers to keep prices low. This has not been taking face value, as this week Saudi Arabia even increased its price settings for Asian customers, even that it was focusing on distillates.
Riyadh and Moscow have been keeping a low profile. No direct indications were made, even not after the Kuwait monitoring meeting. Saudi minister of energy Khalid Al Falih, and his Russian counterpart Alexander Novak, are keeping their cards close to their hearts. Without any real dramatic changes, the current ROPEC deal will still be in place.
For Saudi Arabia, who’s national economic future still largely depends on oil revenues, a possible price collapse due to increased volumes on the market and panic in the financial markets is not a preferred situation. Riyadh definitely doesn’t want a repeat of the scenarios that happened after former energy minister Ali Al Naimi decided to open up the taps. A global price collapse would not only result in major financial issues for the majority of OPEC producers and Russia, threatening the green shoots currently popping up in their respective local economies, it also would have a detrimental impact on the implementation of Saudi Vision 2030 and the position of Crown Prince Mohammed Bin Salman.
Stability of the global oil market and relatively high oil prices is needed to attract the necessary international investments into the Kingdom. The success of the diversification of the Saudi economy, aka removing the still detrimental oil addiction, is still linked to the ROPEC deal. Saudi Arabia is still King of Oil, where current and future stability is directly linked to oil prices. At the same time, without higher oil prices the long-awaited Aramco IPO will again be delayed, which will have severe repercussions for the attractiveness of the Kingdom, as long-term delays of this pivotal IPO will start to question the position and power of MBS.
Looking at the total picture, there is no incentive for Saudi Arabia to open up the tap. Aramco already is producing enough to counter current demand in key markets. At the same time, Saudi Arabia, as the only OPEC producer with real spare production capacity, is slated to be able put in a reasonably short period of time 1-1.5 million bpd of oil on the market. US shale or Russia are not able to at all.
For Riyadh the discussion should focus on how not to squander the current power position the Kingdom holds in the oil market. By bowing to external pressure (Trump, EU, Asia), Riyadh could show weakness. Looking at the current Middle East power constellation, this can’t be allowed. At the same time, market fundamentals don’t necessitate any production increase. Latest market data show no real need for additional volumes to reach markets soon. The two ROPEC deal leaders also have reiterated that they are not looking at a 5-year average of global oil storage volumes but at a 10-year average. This slight deviation from former statements however indicates that both are not willing to substitute oil revenues for volumes.
By keeping to its current strategy, the picture will also be clear for analysts and investors. Within a normal range of price volatility, necessary up- and downstream investments can be made. The Kingdom itself also is not interested in low prices, as its Red Sea and Arabian Gulf offshore projects necessitate higher oil price levels. The Kingdom, even if the national economy is going to be diversified, is still in need to solidify its stability by increasing oil and gas reserves and opening up new production.
Expectations that OPEC will be willing to increase production substantially, to counter Iran sanctions and the implosion of Venezuela, could be based on false assessments. Riyadh and Moscow, supported by the UAE and others, will not see any advantage in flooding the market. Taking additional market share is a larger risk than reaping the financial rewards of perceived shortage. If market share will become the real target, a price war could be the result, leaving Saudi Arabia, Russia and several other countries in shambles.
Small volume increases, as shown last weeks by Saudi Arabia or Russian oils, will be welcomed still. The loss of Iranian crude and petroleum products, due to the threat of US sanctions, can be easily covered for European and Asian clients. Arab Tawila Grand Master MBS and Russian Chess Grand Master Putin will not be willing to risk the financial future of their respective countries. Twitter geopolitics are still not in the same league as the hotline between Riyadh-Moscow and Abu Dhabi.
Iran, Qatar and Venezuela will need to swallow their pride or risk a possible open rift in OPEC. The OPEC Heads of State Meeting in 2007 in Riyadh outcome has shown that this is not the way to go. The losers are already known if the hardliners are still willing to take the risk. Iran and Venezuela don’t have any Jokers in their sleeves anymore.
OPEC secretary general Mohammed Barkindo, the smooth talking but politically savvy strategist, has already repeatedly stated that market stability is needed to underpin future investments needed to prevent a gap in oil supply. The soft looking OPEC leader has a very good line with OPEC leaders. As long as Barkindo does not see a need to increase volumes, analysts should be paying more attention.
