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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