Saudi Arabia has been signaling for weeks that it is and will be doing whatever it takes to rebalance the oil market by slashing exports and pumping well below its quota under the OPEC+ deal-despite US shale's persistence.
Yet, while neither the Saudis nor OPEC would officially admit that they are aiming for higher oil prices or a specific price of oil, the combined efforts of the OPEC/non-OPEC group to withhold 1.2 million bpd of supply are targeting a tighter market-and higher oil prices.
Even if higher oil prices are indeed helping U.S. shale producers to pump oil at record levels, OPEC's largest producer and de facto leader Saudi Arabia reportedly prefers higher oil prices rather than hanging onto its market share.
The Saudis are aiming for at least $70 a barrel Brent Crude because the Kingdom's budget needs these higher prices, industry sources familiar with Saudi Arabia's oil policies tell Reuters. And they may need even higher than that.
According to estimates from the International Monetary Fund (IMF), the Saudis need much higher oil prices for a budget breakeven in 2019-at $80-85 a barrel, Jihad Azour, Director of the Middle East and Central Asia Department at the IMF, told Reuters last month.
Oil at $80, however, is sure to draw harsh criticism from U.S. President Donald Trump, whose oil price 'tolerance threshold' appears to be Brent above $65. The latest tweet aimed at OPEC at the end of February called on the cartel "to take it easy", when oil prices were roughly where they are now-at Brent around $66 a barrel. Related: What Norway's Decision To Divest Means For US Shale
Oil at $80 would also be the beginning of demand destruction at a time when economists and markets are already fretting about slowing economic growth in China and other major economies and the still unresolved U.S.-China trade dispute.
So while the Saudis are probably aware that they can't afford to push oil prices to their budget breakeven, the goal, according to Reuters' sources, is still above the current oil prices.
The last time Brent Crude traded at $70 or above was in early November last year, when prices were plummeting from the $80-plus levels from early October.
At that time, in the run-up to the return of the U.S. sanctions on Iran's oil when Washington was promising zero Iranian exports, Saudi Arabia, its close Gulf Arab allies, and Russia had opened the taps to pump more oil to offset what was expected to be a severe loss of Iranian barrels.
But then the U.S. granted waivers to eight key Iranian customers, sending prices sharply downward, exacerbated by fears of a global economic growth slowdown.
With U.S. waivers due to expire in early May, Saudi Arabia and OPEC appear to be timing oil policy changes more carefully this time around, potentially to prevent high volatility and a miscalculation in supply.
Last week, a panel of the OPEC+ allies said it was recommending that partners cancel a scheduled extraordinary meeting in mid-April, leaving the decision for the cuts extension for a meeting at the end of June instead.
The panel's motivation for scrapping the April meeting is "In consideration that market fundamentals are unlikely to materially change in the next two months." Related: Schlumberger Won't Take New Full-Oilfield Management Projects
Market fundamentals may not materially change in two months, but the U.S. decision on Iranian waivers will be in before OPEC meets at the end of June to decide what to do next-roll over the cuts, extend the cuts with changed quotas, or scrap the reductions.
Saudi Arabia, which has received President Trump's support when the world shunned Riyadh over the killing of Saudi government critic Jamal Khashoggi, could again find itself subject to Trump's pressure to 'take it easy' and relax cuts, especially if oil prices were to reach $70 a barrel or higher.
However, the Saudis may not budge this time, according to a source in OPEC who spoke to Reuters.
"They (the Saudis) do care about Trump, but they can't do whatever he says every time," the OPEC source told Reuters last week.
The fiscal position and budget needs of Saudi Arabia's oil-dependent economy could trump concerns over loss of market share or President Trump's pressure to keep oil prices low.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. More
Comments
To achieve this goal, it has been steeply cutting its production and exports beyond its share of the OPEC+ cuts of 1.2 million barrels a day (mbd). It is aiming to have the global oil market irrevocably balanced by the end of June. If not, then it will lead the way to have the production cuts extended until the end of the year.
Furthermore, Saudi Arabia will never allow itself to be conned again by President Trump as he did last year when he exerted the utmost pressure on it last June to raise its oil production to offset a decline in Iran’s crude oil exports resulting from US sanctions. Saudi Arabia obliged even against its own national interests but ended up with oil prices crashing from $87 a barrel to $50, a reduction of 43% and with the Trump administration issuing sanction waivers to the eight largest buyers of Iranian crude.
Two bearish element could be at play in the global oil market. One is the failure of US sanctions to cost Iran the loss of even a single barrel of oil. That is why the Trump administration has no alternative but to renew the sanction waivers it issued last year to the eight biggest buyers of Iranian crude when they expire in May or issue new ones for no other reason than to use them as a fig leaf to mask the fact that US sanctions have yet to cost Iran the loss of even a single barrel and the fact that the zero exports option is a bridge too far.
The other is a delay in reaching an early settlement of the trade war between the US and China. Though the trade war has been hurting the United States far more than China, President Trump, emboldened by his clearance of collusion with the Russians, might try to drag his feet hoping that he can extract some concessions from China.
However, he should by now be aware that China will never put its name to any agreement that would enable President Trump to claim victory.
Still, I am convinced that bullish influences will eventually prevail because they are underpinned by robust fundamentals of the global economy, a rising global oil demand adding 1.55 mbd to over 2018 and China’s insatiable thirst for oil with its imports projected to hit 11 mbd this year.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
Even if oil were $35 a barrel, with it costing only around $3 to produce that's over 1000% profit. Who do they think they are?
But they'd still rather cut off their noses to spite their faces. Demanding $70 for a barrel and not being able to sell that barrel = 0.
This cannot last and they are not creating market stability. No market, not even the oil market, benefits from monopoly and manipulation. I don't think its even in the long term best interests of the Saudi people.