Liam Denning /Bloomberg: Saudi Arabia
sets up a scrappy new year with Trump
Saudi Energy Minister Khalid al-Falih.
Its OPEC-plus production cut shows its economic
need overpowers its fear of angry tweets.
If Friday's last-minute deal by the OPEC-plus group sparks a big rally in oil prices, then it and Saudi Arabia, especially, can probably expect a few holiday tweets from a certain president. Judging from comments made by Khalid Al-Falih, the country's energy minister, they seem to expect as much.
OPEC says it will cut 800,000 barrels a day of production starting in January, while its 10 partner countries have pledged to take out 400,000 a day. Oil prices jumped, erasing the plunge that followed Thursday's inconclusive meeting. Even so, Brent crude oil is still only at $63 a barrel. That could change, however, if Saudi Arabia follows through on comments made by Al-Falih at Friday's press conference.
While the group didn't give specific quotas for each member, the overall figure implies a cut of 3 percent versus October production except for the three countries exempted (Iran, Libya and Venezuela). That would mean Saudi Arabia going from about 10.6 million barrels a day to 10.3 million. However, Al-Falih said the country produced 11.1 million barrels in November and guided for 10.2 million barrels a day in January, when the cuts are due to begin. So rather than cutting 300,000 barrels a day, Saudi Arabia may be taking out three times that amount in the near term, more than OPEC's entire pledge.
That sharp cutback looks designed to mitigate the seasonal slowdown in oil demand. While OPEC's forecasts imply a pre-cut surplus next year of almost 1.5 million barrels a day, the figure for the first quarter is almost 1.8 million barrels a day. If Saudi Arabia held that January level for the whole quarter, and the rest of the OPEC-plus group fulfilled their obligations, then the overall cuts would almost exactly match that projected surplus, wiping it out.
In reality, not everyone will necessarily cut; Russia, in particular, will take a gradual approach. Even so, Saudi Arabia's move could push oil prices back toward the $70 or $80 level where Trump's twitter fingers get itchy . Hence, perhaps, Al-Falih went out of his way during Friday's press conference to point out that, by supporting oil prices, OPEC's actions would have U.S. producers “breathing a sigh of relief,” encouraging them to set higher budgets for 2019 and, importantly, avoid layoffs.
Saudi Arabia may well be calculating Trump focuses on America's oil workers rather than drivers. The weakness there, and it's a rather obvious one, is that the latter far outnumber the former. Yes, investment has multiplier effects spreading the gains of higher oil prices further than just the rigs and roughnecks. But those benefits are rather concentrated, whereas pump prices affect everyone across the U.S. They're also concentrated in states such as Texas, Oklahoma and North Dakota – not places Trump would likely lose in 2020 elections anyway.
Regardless, Saudi Arabia's economic interests must ultimately trump any wariness about Trump. The agreement actually benefits the country disproportionately in two ways.
First, the lack of specific targets provides cover for the country to shift production up and down depending on demand signals, production from other countries and, of course, tweets. Second, Saudi Arabia is one of the OPEC-plus group's “haves,” with the capacity to raise production, as opposed to have-nots such as Venezuela. And this agreement, by shifting the baseline for cuts to October 2018 from the previous one of October 2016, rewards the “haves.”
In doing so, the new agreement is a tacit acknowledgement of the growing divide within OPEC and growing reliance on Moscow; especially so in light of the fact that a deal only emerged on Friday, with the assistance of Russian energy minister Alexander Novak.
And guess what: We get to do it all again in just four months' time. This new agreement is penciled in for an initial six months (even if it actually forms just another leg of the cuts that began in January 2017; they were penciled in for six months too). OPEC-plus is moving up its mid-year meeting to assess progress. That's a sign of just how many moving pieces Saudi Arabia and Co. are trying to balance here, ranging from global demand to U.S. production and the wildcards of Iranian sanctions, Venezuela's collapse, and Trump's domestic priorities.
Two years after pulling the oil market out of a funk with some high drama, Vienna's much-expanded oil club has done it again. The fact it has had to do so, and likely will have to again, should temper celebrations.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker. Petroleumworld does not necessarily share these views.
Editor's Note: This article was originally published by Bloomberg Dic. 07, 2018. All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld.
Use Notice: This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of issues of environmental and humanitarian significance. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml.
Hit your target - Advertise with us
PW 300.000 plus request per week
All works published by Petroleumworld are in accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.
Petroleumworld has no affiliation whatsoever with the originator of this article nor is Petroleumworld endorsed or sponsored by the originator. Petroleumworld encourages persons to reproduce, reprint, or broadcast Petroleumworld articles provided that any such reproduction identify the original source, http://www.petroleumworld.com or else and it is done within the fair use as provided for in section 107 of the US Copyright Law.
If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner. Internet web links to http://www.petroleumworld.com are appreciated. Petroleumworld Copyright© 1999-2018 Petroleumworld or respective author or news agency. All rights reserved.
We welcome the use of Petroleumworld™ stories by anyone provided it mentions Petroleumworld.com as the source. Other stories you have to get authorization by its authors. Internet web links to http://www.petroleumworld.com are appreciated.
Petroleumworld welcomes your feedback and comments, share your thoughts on this article, your feedback is important to us!
Petroleumworld News 12 /07 /2018
We invite all our readers to share with us
their views and comments about this article.
Send this story to a friend
Write to firstname.lastname@example.org
By using this link, you agree to allow PW
to publish your comments on our letters page.
Any question or suggestions,
please write to: email@example.com
Best Viewed with IE 5.01+ Windows NT 4.0, '95,
'98,ME,XP, Vista, Windows 7,8 +/ 800x600 pixels