The OPEC circus continues to make headlines. All the five-star hotels are booked, as market analysts fervently examine their glass balls to predict the outcome of Thursday’s big meeting. Again, OPEC strategists have successfully raised media attention to a level where the oil market’s future is undecided. However, the new structure of the oil market was already decided weeks ago between Moscow and Riyadh.
Though Saudi Crown Prince Mohammed bin Salman (MBS) has limited his agenda to the media frenzy of the Colditz Castle of Riyadh (a.k.a. the Ritz Carlton) and the ongoing Iranian-Qatari war drums, Saudi Arabia, OPEC’s unquestionable leader-to-be for the coming decades, has already put its new market strategy in place. The kingdom will continue its export cuts, while shaping the market increasingly by conquering market share in the petroleum products market.
On the short term, analysts are looking at statements coming from the cramped media rooms of OPEC’s Vienna headquarters—and the knowledge spread by the respective OPEC oil ministers will be flabbergasting. Statements by OPEC Secretary General Mohammed Barkindo, Saudi Oil Minister Khalid Al-Falih, and Iran Oil Minister Bijan Zangeneh will be assessed and taken as reality, while markets react accordingly.
Russian Energy Minister Alexander Novak will continue his theatrical play of being a market shaper, largely repeating that Moscow is behind an extension of the production cut agreement. Novak will also will warn for growing market pressure, which looks to become overheated. The latter could be taken as reason in 2018 to end the OPEC–non-OPEC agreement.
Another oil price increase, caused by shortages in the market or a continuation of the stock draw, is regarded as a possible boon for U.S. shale production. For the mid- to long-term, however, two other major issues will affect the oil market more than OPEC discussions in Vienna.
First, the continuation of the production cut agreement (which in reality is only a crude export cut agreement) is under pressure as several OPEC members head toward a full military confrontation. The increased tension between the Iran- and Saudi-led blocks in the Middle East will have a much more detrimental effect on crude oil markets than any OPEC–Russia agreement in place. Not only could a military confrontation in Lebanon or Iraq lead to a total destabilization of the region, but will also constrain major oil production and export volumes in due course. Without taking the latter into account, oil market analysis is currently without any basis.
Iran’s ongoing support of proxies in Lebanon, Syria, Yemen and Iraq will lead to a showdown. The United States and Russia are currently only players on the sidelines, while Saudi’s MBS, in cooperation with UAE’s Sheikh Mohammed bin Zayed, are establishing a strategy of collision, no longer willing to find any diplomatic solution.
OPEC’s current stability is already a farce, as geopolitics and regional power plays are having a much larger impact than only hydrocarbon revenues. Russia, officially an ally of Iran—as was needed to confront Daesh and the Syrian opposition—is already is turning its back on Tehran. Whatever the Arab front is planning, Moscow and Washington will take a backseat.
As for the second issue, OPEC’s main players (especially Saudi Arabia) seem to be changing their traditional position of focusing on crude oil export revenue based strategies. After being confronted by half a decade of oil glut and high crude oil stock volumes, Riyadh slowly but steadily changed its investment strategies significantly. The former crude oil exporter has become a sleeping giant on the downstream front. The kingdom’s sleeping giant, Aramco, is now a major new force to reckon with worldwide, due to its multibillion refinery investment spree in Asia and the U.S. More important, however, is the only slightly reported discussion within the kingdom about the increased cooperation between Saudi Aramco and Saudi Arabia Basic Industries (SABIC).
Last week, news emerged about preliminary plans to build a $20 billion complex to convert crude oil to chemicals. Officially, the deal is part of the kingdom’s strategy to diversify its economy beyond exporting crude. Aramco and SABIC, a former Aramco spin-off, will set up the world’s largest crude-to-chemicals facility, able to produce nine million tons of chemicals and base oils per year. As an additional product, the facility can produce around 400,000 bpd of diesel for local consumption. If implemented, the project would use around 400,000 bpd of Arabian light. SABIC’s CEO Yousef Al-Benyan indicated that the new facility would involve two or three crackers, which are used to break heavy hydrocarbons into petrochemicals. The use of so-called flexi-crackers would enable the firms to break down a range of feeds: oil, gas or naphtha.
This should be seen as part of a bigger picture. With more non-OPEC production expected to come available, based on U.S. shale and other unconventional oils worldwide, OPEC’s production cut agreement can only confront part of the threat in the future. If Saudi Arabia continues to be the major force behind the production or export cuts, the kingdom will face not only lower income but also lower market share. Competitors will try to fill the gap.
Riyadh’s strategy, however, is proactive—in stark contrast to the past. By addressing new opportunities in downstream, not only can it continue its current production cut agreement, but can also target new market share in downstream. Without having to open the gates of hell, which would be caused by ending the current OPEC–non-OPEC agreement, Saudi Arabia can regain part of its lost revenue base and confront new competitors in upstream on their own turf. Saudi—and likely other Arab—downstream products aren’t currently bound by any production agreement, leaving room for worldwide competition. Without taking any chance of disturbances in the oil market, Aramco can continue its drive for a stable crude oil market, balancing its traditional revenue base while opening up new profitable new ventures.
Others will definitely follow Aramco’s new strategy. Its Emirati compatriot ADNOC already shows increased interest in downstream, not only domestically but also in its Asian markets. Others will follow within the oil cartel. The current views held by some Arab leaders is to let the Western analysts keep their focus on oil stocks and volumes, stabilizing the market base, which leads to higher crude prices, while Riyadh, Abu Dhabi and others are establish a power base in downstream. This new situation not only increases the oil cartel’s power position, but also opens the possibility of increased upstream spending and production volumes, without directly disturbing the markets.
Crude oil volumes on the global market will continue to be reasonably stable, keeping the status quo between demand and supply.
So the message from Riyadh, not Vienna, is “please look at crude volumes while we take downstream profits, too!”
Also published on Oilprice.com
