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Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Saudis Scramble To Arrest Oil Price Slide

Saudi Arabia has approached other members of OPEC to discuss possible steps they can take to arrest a slide in oil prices that have brought them to the lowest in seven months.

Bloomberg quotes an unnamed Saudi official as saying Riyadh was not willing to tolerate this price trend, and was open to all options. The source, however, stopped short of detailing any of these options.

The pinch is certainly painful: Saudi Arabia cut more oil production than it had agreed to under the OPEC+ agreement to stabilize prices, and prices are falling despite this. The Kingdom also recently said it would cut its selling prices for Asian clients, which could not have been good for revenue streams, either.

There is precious little Saudi Arabia—or OPEC, for that matter—could actually do. They could cut deeper, with the expected consequences, which would likely be a temporary improvement in prices and then another slide as trade war-related worry reasserts itself as the leading cause for oil demand pessimism. The fact that the latest drop in oil prices was the result of a spike in worry about a currency war is telling enough.

Alternatively, they could open the taps because there is the United States and its shale revolution that has turned it into one of the world’s top ten oil exporters. This revolution was also the main driver of lower prices that forced OPEC to act in the first place. Shale oil is relatively expensive to produce and the great majority of the companies extracting it are burning cash already, so a drown-them-in-oil strategy could send a lot of these under.

Unfortunately, this strategy won’t be any gentler on the OPEC members applying it. Most Gulf producers are still struggling with budget deficits and their belated efforts to diversify their economies. Saudi Arabia alone has committed hundreds of billions of dollars to such diversification projects, but their success hinges on continued oil exports at a certain price level.

By Irina Slav for Oilprice.com

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  • Mamdouh Salameh on August 08 2019 said:
    Saudi Arabia-led OPEC and the global oil market are facing a crisis not of their own making. The problem is the escalating trade war between the US and China which is depressing global oil demand and oil prices and also augmenting an already existing glut in the market.

    Whilst production cuts can in normal circumstances help absorb the glut in the market particularly when the fundamentals of the global economy are positive, they are useless against a raging trade war.

    So when Saudi Arabia says it is open to all options to stop the slide in oil prices, whatever measures it agrees with other OPEC members will be futile because they will be dealing with the symptoms of the crisis rather than the crisis itself for which they are powerless like everybody else in the world except the warring nations: the United States and China.

    However, the escalating trade war is not principally about oil or China’s trade surplus and alleged Chinese malpractices. It is about the petro-yuan undermining the supremacy of the petrodollar and by extension the US financial system, Taiwan, refusal by China to comply with US sanctions against Iran, China’s overwhelming dominance in the Asia-Pacific region and its sovereignty claim over 90% of the South China Sea, the new order in the 21st century and above all fear of the US losing its unipolar status.

    President Trump and his advisers already know that they lost the trade war with China and are finding it hugely difficult to admit defeat, hence the prolonging of a futile war.

    President Trump has backed himself into a corner, leaving himself few face-saving ways to exit the trade war. Only one option is open to him now, namely to call off his trade war against China and negotiate an end to the war on China’s terms.

    While this is happening, Saudi-led OPEC and the whole world will by mere spectators.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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