In the world of oil, Saudi Arabia likes to pride itself as the producer of last resort. Recent years have, however, proven a more appropriate description for the kingdom as a crude producer: the loser of first resort.
After the global dominance of hydrocarbons production and the influence of price-setting for a barrel shifted from the Seven Sisters of Oil to the Organization of Petroleum Exporting Countries with the 1973 Arab Embargo, the Saudis were virtually unshakable in their stranglehold of the industry for 40 years.
But the last five years have left the kingdom as the symbolic ruler of an OPEC that is as beholden to its subjects’ wishes, as much as its wish to be the final arbiter of the group’s output.
At best, Riyadh’s ability to moderate its own production/revenue ideals with that of OPEC+, an enlarged 23-nation alliance that now includes non-members like Russia, is a grand compromise.
'Perpetual Loser', From A Production Point
At worst, the accommodations made by the kingdom since 2016 in its desperate bid to keep crude prices up makes it a perpetual loser. Up until last year, the Saudis had to manage a tidal wave of rival US shale oil production almost entirely on their own, despite having 22 other so-called partners in OPEC+. At the same time, the kingdom had to sacrifice much of its own output so that the rest in the group, led by a crafty Moscow, could produce the barrels they wanted.
And as another OPEC+ meeting looms this week, this time to set production quotas for April onwards, another grand compromise—or lost Saudi opportunity in optimizing production and increasing market share—seems to be in the making.
To rewind the tape a little, Saudi Oil Minister, Prince Abdulaziz bin Salman, had already given up—without being asked—1.0 million barrels per day of the kingdom’s production for February and March when OPEC+ last met in January.
Then, Russia and Kazakhstan—both non-OPEC members in the alliance—wanted to raise output, after the group’s production cuts since May had almost doubled crude prices. Not wanting the rallying market to lose its momentum on talk of higher production, the Saudi oil minister did the unthinkable: announce a cut, instead of a hike, in production.
Russian Deputy Prime Minister Alexander Novak, who couldn’t believe what he was hearing from the prince, jubilantly told media covering the event that the unilateral Saudi cut was “a great New Year present for the whole oil industry.” But away from the cameras, he tried to counsel his Saudi counterpart, according to Bloomberg.
Amrita Sen, co-founder of the Energy Aspects consultancy in London, said Novak was probably telling the prince that “from Russia’s perspective, if OPEC+ is not willing to lift production by just half a million barrels a day in a $50 market, then, by the time the group is willing to boost output, it may well have already lost market share.”
But Abdulaziz had made the decision with his half-brother, Saudi Crown Prince Mohammed bin Salman. Both wanted to prove they knew this market better than the hedge fund managers in New York and London who made a living by shorting oil.
Novak’s advice was politely declined, and the Russian minister still walked away jubilantly as he knew the price hike that would follow at the expense of the Saudi gambit would make up for any compromise he made on the production hikes he wanted (proving Moscow was always crafty in dealing with the Saudis). The Salman brothers would be proven right: Crude prices would jump from a little over $50 per barrel before the OPEC+ meeting in January to $67 per barrel for Brent and $63 for US crude.
Now, let’s fast forward to the present..
Saudis Plan To Not Rock The Boat; But Russians May Want More
Popular opinion is that OPEC+ will agree this week to a 500,000 barrel-per-day rise from April that doesn’t rock the boat in already treacherous coronavirus recovery waters.
But speculation is also swirling that the Russians—always appearing more eager to roll out barrels than the Saudis in their fragile four-year cooperation—will want a hike of 1.0 million bpd or even larger.
The Saudis and Russians had an acrimonious showdown one year ago, resulting in Riyadh embarking on a maximum output campaign at the height of the COVID-19 outbreak that took US crude to a historic negative pricing of -$40 per barrel. Since the two sides patched things up in May, OPEC+ has been withholding at least 7.0 million bpd from the market daily.
Arguably, after 10 straight months of production cuts, OPEC+ has considerably drained global stockpiles of oil to near normal five-year inventory levels. Projections of higher demand for energy in the coming months as COVID-19 vaccinations accelerate could also keep oil prices supported at current levels or above.
But that seems to matter little to oil traders petrified at the mere thought of more oil entering the system—even if it is the same 1.0 million bpd the Saudis had taken out since February. Fear of what OPEC+ might do on the extreme end has wiped some 5% off oil prices since Friday.
That market swing is likely to play on Saudi minds—again preventing them from meaningfully adding to their own production in order to expand, if not least, defend their market share. It has often been reported that the Saudis need to export about 8.0 million barrels daily, at at least $80 per barrel, to sustain their economy.
The Saudi 'Curse'—Cut Or Be Damned
Adam Button, markets’ commentator on ForexLive, believes the Saudis want to pump more when their current voluntary cut of 1.0 million bpd expires in April. “At the same time, they all have to be happy with higher prices and won't want to bust them $6-8 lower.”
John Kilduff, partner at New York energy hedge fund Again Capital, said Riyadh will likely divvy up the larger portion of any agreed hike to the Russians and take the smaller share for itself—or even forego an immediate hike through May in the spirit of further supporting the market.
He adds:
“Going forth, I don’t see a way out of this for the Saudis. They are in this trap of perpetually cutting and losing market share to the Russians and everyone else in OPEC+ if they want to keep oil prices supported. They assumed guardianship of the cartel and now they have to pay the price for this. The market expects it of them. It’s the Saudi curse—cut or be damned.”
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. As an analyst for Investing.com he presents divergent views and market variables. He does not hold a position in the commodities and securities he writes about.