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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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Saudis Tread On Thin Ice As Prices Slide

Energy planners in Saudi Arabia must be scratching their heads in wonder, even possibly despair. The oil-rich kingdom had picked itself up after threats of near economic collapse in 2015-2016 amid a then oversupply scenario in global oil markets with prices that dropped to multi-year lows, but now things are looking grim once again.

After the kingdom's ill-fated decision in late 2014 to open the oil production spigots and ramp up production in the midst of an oil supply glut mostly due to increased U.S. shale oil production, prices tumbled. They had reached over $100 per barrel in mid-2014, but by January 2016 had dipped below the psychologically important and economically damaging $30 per barrel price point.

The results for the Saudis was cataclysmic, with problems ranging from historically high budget deficits (reaching a then-record high of $98 billion in 2015) to being forced to put in place its first ever and politically unpopular austerity measures as well as issuing its first international bond sale to raise much-needed funds.

By October 2016, with Saudi state coffers low and the government bleeding red ink, Mohamed Al Tuwaijri, the Saudi deputy economic minister, said in a rare appearance on national television, “if we (Saudi Arabia) didn’t take any reform measures, and if the global economy stays the same, then we’re doomed for bankruptcy in three to four years."

The formation of OPEC+

By late 2016, the Saudis had had enough and were forced to turn to non-OPEC producers to stop the pain, including oil production heavyweight and longtime adversary Russia, forming what is now known as OPEC+. The new group of oil producing partners was able to trim oil production enough to restore OECD oil inventory levels back to five year averages around the third quarter of 2017 and not only put a floor under prices, in essence restoring a semblance of market equilibrium, but their actions drove prices to four year highs this October, so high that it created concerns of demand destruction. Related: Can China Save South Sudan’s Oil Sector?

As the Saudis, albeit with Russia’s help, regained control of global oil markets, it seemed that the kingdom got its swagger back, including a global charm offensive by its young and charismatic

de facto leader Mohammed bin Salman. His softer tone with longtime regional foe Israel, his close relationship with the Trump administration and his plans to revamp the Saudi economy, including less dependency on oil revenue seemed too good to be true - but at the end of the day, it fell apart.

The global oil price plunge

Global oil markets became saturated again, oil prices have quickly dropped around 40 percent since reaching October highs, along with slowing global economic growth in large part due to ongoing trade tensions between Washington and Beijing are setting in. On top of this laundry list of oil market worries, the world’s top three oil producers, the U.S., Russia and Saudi Arabia, have been pumping oil at record levels.

Waning Saudi prestige

However, the biggest detriment in the Saudi plan to revamp both its global image and its economy has been Saudi implication in the controversial death of dissident journalist Jamal Khashoggi in early October in the Saudi consulate in Turkey. Now, amid still fresh wounds to Saudi prestige as well as doubt over bin Salman’s ability to rule the kingdom, foreign investment in Saudi Arabia is drying up, possibly taking the kingdom precipitously close to the dismal days of 2015 and 2016 when it looked like Saudi Arabia could come apart at the seams. Related: Chinese Refiners Aren’t Buying U.S. Crude

Meanwhile, oil prices are continuing their downward trajectory, with wilder swings that previous markets, likely due to increased speculation and more electric trading of the commodity. Global oil benchmark Brent crude is now trading in the mid-$50s range, while U.S. oil benchmark, NYMEX-traded West Texas Intermediate (WTI) crude is hovering in the mid-$40s range, a price point unthinkable just two months ago.

It remains to be seen if the new OPEC+ oil production deal to trim output by 1.2 million b/d, starting in January and lasting for six months, with a review period in April, will help oil market jitters and be enough to dry up oversupply. However, given that the U.S. will continue to ramp up production, to an U.S. Energy Information Administration estimated 12.1 million b/d or higher next year, and with the likelihood that no trade deal will be reached between Washington and Beijing by their self-imposed March 2 deadline, oil markets will likely remain nervous with prices through the first quarter remaining in the mid $40 to mid $50s range or possibly lower, at which point déjà vu will set in for Saudi Arabia, all too reminiscent of a few years ago when the kingdom barely survived economically. Good luck, Saudi Arabia, you’re going to need it.

By Tim Daiss for Oilprice.com

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  • Mamdouh G Salameh on December 23 2018 said:
    Before becoming another prophet of doom, let me give you a few facts of life. One is that Saudi Arabia is one of two countries in the world capable of flooding or starving the global oil market. The other is Russia.

    A second fact is that Saudi Arabia will do whatever it takes to get oil prices above $80 a barrel since it wants to avoid another ordeal like the one that followed the 2014 oil crash and also because it needs an oil price higher than $80 to balance its budget. This means that it will be prepared to cut its production drastically in support of oil prices.

    A third fact is that it normally takes a few months before the recently-agreed cuts by OPEC+ filter into the global oil market.

    A fourth fact is that Saudi Arabia occasionally makes an error of judgement like the one it made in June under pressure from President Trump when it added jointly with Russia 650,000 barrels a day (b/d) to the market thus widening an already-existing small glut. Saudi Arabia should disengage from the United States since it is the root of all its problems.

    A fifth fact is that the US manipulates oil prices by falsifying claims about rising US oil production and significant build-up in US crude and products inventories and hiking the value of the US dollar opposite other currencies. To put an end to this practice, OPEC members are well advised to cut all their oil exports to the US estimated at 4.7 mbd which have been augmenting US crude oil inventories. They should also adopt the petro-yuan in preference to the dollar since 80% of their oil exports go to the Asia-Pacific region particularly China.

    A sixth fact is that while oil prices are currently under intensive bearish influences, bullish factors will eventually prevail early in 2019 enabling prices to resume their surge.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Frank on December 24 2018 said:
    I think this is about it for royal family control.

    Minimum $100B deficits to keep paying off the populace
    Credit rating is coming down (in the background).
    Brent capped at $60 for the next 18 months.

    Maybe they squeak through to 2023, but I doubt it. Here comes the chaos.
  • James De Laccio on December 25 2018 said:
    Poor poor goatf*, they will have to work again for living, and no visits to Bahrain.
  • James De Laccio on December 26 2018 said:
    I believe that all Arabs would like to see USD 300 / barrel, but well, even if that means faking oil reserves as in case of Saudi Arabia, to maintain the influence in OPEC. Just relax, and watch, the truth will surface soon, what is there under the sandy soil, and what ammo do they have to fight emerging markerts (Permian etc.). Saudis call themselves truth seekers, always searchung for their "religious truth" or whatever. Let's see what bitter truth they will find once the reality uncovers them. I have never seen a strong men with easy past. Their past was just too easy. All the rest are fairy tales.

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