Oil Rises, But Saudis Face Daunting Dilemma

OPEC producers have reached a catch-22 in their quest to rebalance global supply fundamentals for their precious crude oil markets.

While deeper cuts are necessary to bring supply and demand to parity, any boost in oil prices that does occur will spur additional output from the United States – a booming player in the international oil game ever since it entered in December 2015.

“It seems like OPEC really faces a mission impossible at this time, which is to try to tighten oil markets and to sustain oil prices,” Victor Shum of IHS Markit told CNBC Asia on Monday.

New shale output from the Bakken and Permian basins in the U.S. will cut into Middle Eastern and Latin American dominance of the world’s largest crude markets.

“They realize that if they tried to jump start prices they would get short-term benefit from increasing prices over the next six months or so, but they would get a real head of steam behind U.S. production growth heading into next year, more loss of market share and eventually prices coming down toward the same equilibrium,” Greg Priddy of Eurasia Group told CNBC this week.

The dissolution of all price gains since January has led the bloc to adopt additional restrictions to jumpstart the oil and gas recovery. On Monday, top OPEC exporter Saudi Arabia announced export limits at 6.6 million barrels per day for August – a million barrels lower than its figures for the same month last year. Nigeria, one of two African nations exempt from the November production quotas, also vowed to cap output once it reaches 1.8 million barrels per day later this year.

Prices jumped over the $50 line once those two announcements hit international media, and while the growth had been based on mere promises, none of their plans have actualized yet. Still, enthusiasm continued to grow on positive news from the API regarding a serious drawdown in crude oil stocks in the United States.

Related: Daily OPEC Oil Prices Now Public For The First Time Ever

Ecuador’s new defiance poses another threat to the long-term cuts. The nation became the first OPEC nation to announce its informal withdrawal from the output cuts last week, when it said it would raise output next month to plug large gaps in the national budget. Though the small South American country’s production totals just 545,000 bpd, Ecuador’s decision to sidestep OPEC will damage the bloc’s political capital. Transnational organizations are only as useful as their word.

“We need funds for the fiscal treasury and for that reason we’ve taken the decision to gradually increase production, although not to the country’s full potential, because of OPEC’s output restrictions and the ceiling that we have as a result,” Oil Minister Carlos Perez in a recent interview.

The 1.2-million-barrel cut is, for now, set to last until March 2018, but the longer OPEC extends the deal, the more likely it is that member countries begin defecting from the agreement. Each new barrel in production will cut into Saudi Arabia’s revenues, since Riyadh has made clear its role as chief output martyr since the beginning of the year.

Saudi Aramco’s 2018 initial public offering weighs heavily on the minds of the KSA’s financial planners and newly crowned Prince Mohammed bin Salman. Conquering Vision 2030 is a make it or break it solution for Saudi Arabia. Missing the deadline to diversify its economy away from oil will lead to the collapse of the Saud family’s absolute monarchy and the stability of Islamic world’s holiest lands.

So, what will it be for Riyadh? Either the nation cuts into its oil revenues today for the sake of a more vibrant tomorrow, or it allows its Aramco IPO to fall through from low oil prices, foiling Bin Salman’s scheme for an oil-independent KSA.

U.S. shale producers have the rigs on standby, waiting for an executive decision from OPEC leadership.

By Zainab Calcuttawala for Oilprice.com

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