When Saudi Oil Minister Abdulaziz bin Salman holds a Zoom call next week for the sixth time this year with his peers from 22 countries, he’ll probably not be thinking of new schemes to get the market higher, but rather about how to stop the group before him from pumping more crude than they ought to at these prices.
It can, of course, be argued that this is a daily job for AbS, as the minister is also referred to at times, by his initials.
Since he came to office a little less than two years ago, each AbS-chaired meeting of the 13-member OPEC, or Organization of the Petroleum Exporting Countries, and its 10 allies led by Russia—who come together as OPEC+— began with calls for significantly higher production quotas. He deftly shot each one down, reminding the output hawks in the group that there’s something else more important: the price of oil itself. And, of course, demand and market share.
As a result of AbS’ efforts, OPEC+ compliance to Saudi-led production cuts has reached an unbelievable 122% since the COVID demand destruction that took US crude to minus $40 per barrel in April 2020.
I say unbelievable, because anyone who has tracked OPEC for a decent portion of its 60 years will know of its legacy of cheating, where output quotas are concerned. And while the Russians only started working earnestly with the cartel five years ago, they’ve become the new villain of the piece (as far as the Saudis are concerned) for over-production within the enlarged OPEC+. Russian Oil Minister and Deputy Prime Minister Alexander Novak habitually pushes AbS to the edge on quotas at each OPEC+ meeting, before walking away with a deal that appears to work to Moscow’s advantage more than Riyadh’s.
In fact, the 2020 oil market collapse was precipitated by the very-public-and-ugly breakdown in output talks between the Saudis and Russians, just before the onset of the pandemic. The lion’s share of OPEC+ cuts since has been shouldered by Riyadh, though AbS deserves credit for handing out production limits to the other 22 in the coalition and ensuring that they stick to them.
Neither Producers, Nor Consumers Too Happy Now
But with each passing month of oil market recovery, the Saudi minister’s challenge to get the Russians—as well as legacy cheaters in OPEC such as Iraq and Nigeria—to respect the quotas he draws has only increased. And the reason, ironically, is the same price of oil that AbS once pointed to as the reason why deep cuts should continue. That price is now more than triple where it stood on Apr. 13, 2020, when OPEC+ first announced that it will withhold some 9.7 million barrels per day from the market.
At an average of $26 a barrel then—and a world practically swimming in oil, with no takers—it was easy to understand why OPEC+ nations bought so strongly into the production cuts.
Now, at $73 a barrel for US crude and $75 for Brent, it’s also easy to understand why those same nations are itching to produce more, in order to add desperately needed revenue to their coffers starved by a year of pandemic distress.
More than anyone else, AbS understands this. The Saudi coffers would also benefit from more production at these prices. But the minister is also aware of the risk of turning on OPEC+ taps more than necessary now, especially in a world where COVID-19 vaccinations are severely imbalanced and where another variant of the virus, Delta, has begun raging.
Saudi Minister Still Not Convinced About Oil Demand
This explains AbS’ mantra each time he was asked about oil demand over the past few months:
“I will believe it when I see it.”
Yes, despite global inventories back at five-year seasonal trends; despite the market virtually draining all of the excess supply from the COVID-triggered glut; despite US drillers pumping 2 million barrels less per day now than before the pandemic; and despite a barrel trading three times higher today than 14 months ago, the Saudi minister is still not convinced about oil demand.
But AbS also knows the danger of allowing the price of oil to continue ripping the way it has since November, when breakthroughs for the first COVID vaccines were announced.
At some point, ramping oil prices are going to hurt the global economy—if they haven’t already, judging by the persistent complaints of India, the third largest importer of crude, and the 7-year high in US pump prices of gasoline.
Apparently taking heed of these, AbS said on Thursday:
“We have a role in taming and containing inflation, by making sure that this market doesn’t get out of hand.”
A Dual Problem And A High-Wire Balancing Act
Hence, AbS has a dual problem: He needs to raise production by just enough to placate OPEC+, who want to put out some extra barrels this summer, and he needs to cool the red-hot oil rally; yet he has to make sure that the hike he authorizes doesn’t weigh too heavily on the psyche of crude traders.
For the record, OPEC+ has said it was considering a 500,000 barrels per day hike in its August output, after agreeing to a 440,000-bpd increase in July.
But nothing is certain until the group meets on July 1. It would not be surprising to hear Russia and some others demanding for as much 700,000-800,000 bpd more for August, given that OPEC+ is still withholding 5.8 million barrels daily from the market.
The Paris-based International Energy Agency, which looks after the interest of Western oil importing nations, has urged OPEC+ to start tapping its spare production capacity to bolster supply as demand rebounds. Wall Street trading behemoth Goldman Sachs estimates the oil market is running a deficit of 3 million barrels a day, and has predicted a Brent price of $80 before July—a prophecy that looks likely to happen. Not to be outdone, Bank of America has forecast $100 a barrel.
All these combine to make AbS’ production maneuvers a high-wire balancing act that gets increasingly dangerous with each OPEC+ meeting, says Tariq Zahir, who runs the oil-centric Tyche Capital Advisors fund in New York.
The fund manager adds:
“People are talking about $100 oil, thinking that’s what the Saudis want. They could not be more wrong. AbS doesn’t want $100 oil. He’s probably very happy with the current price. What he’s worried about is keeping OPEC+ together at these prices, instead of letting everyone out to produce crazily like before.”
Zahir also reminds us that once the summer consumption of oil is over, there’ll be a seasonal slowdown that will affect all travel, including flights.
"There’s also a chance of the Delta variant of the virus screwing up the global recovery in coming months, and the likelihood of Iran getting a nuclear deal in the fourth quarter. None of these is friendly to oil demand.”
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.