Led by budgets and shale, OPEC open to risking Trump’s ire
Most of the cartel’s nations risk steep deficits after oil-price crash
With crude prices down nearly a third in less than two months, officials in many OPEC countries say the need for collective action to halt the oil price rout outweighs the risk of riling a U.S. president who has publicly accused them of plotting to keep prices high.
“It is in their economic selfinterest to cut production,” said Helima Croft, chief commodities strategist at Canada’s RBC.
Before the global benchmark oil price tumbled to nearly $60 (U.S.) a barrel, President Trump had bent OPEC and its allies into inaction over what to do about falling prices. But the strategy has hit a breaking point: For many OPEC countries, the price of oil is now far lower than what officials need to balance national budgets.
Those concerns will weigh on delegates to the Organization of the Petroleum Exporting Countries as they determine the global alliance’s course for 2019 at a meeting in Vienna next week.
Oil producers need to look at “how to mitigate pressure from Trump,” said one Persian Gulf OPEC official. “We also need to look at our economy and we do need to make sure prices won’t collapse,” he said.
Oil producers have been coy about plans to reduce their production amid Mr. Trump’s public chiding on Twitter and private threats made to Saudi Arabia that he would back legislation aimed at making OPEC an illegal cartel. They also have been concerned that any price increase might benefit rival U.S. producers.
Lofty social spending plans throughout the Gulf region hang in the balance. Brent crude fell by 7% a barrel on Friday to as low as $58 a barrel. Saudi Arabia, with a young population and an aim to wean its economy off oil, needs $88-abarrel oil to balance its budget.
The United Arab Emirates, its Persian Gulf ally, requires a $71 price tag, according to the International Monetary Fund. At current prices, Iraq, Kuwait and Qatar would be the only key producers in the cartel balancing their budgets.
The 15-nation cartel, along with10 Russia-led allies, is set to decide at meetings on Dec. 6 and 7 how much oil it should produce next year. The Saudis have been pumping 1 million barrels a day above their target after Mr. Trump pressured the country into ramping up oil production to record levels ahead of the sanctions on Iran’s petroleum industry.
The Saudis need to avoid offending Mr. Trump in particular because Riyadh fears U.S. sanctions over the killing of journalist Jamal Khashoggi by the kingdom’s operatives.
As a compromise, Saudi Arabia and OPEC have been inching toward a production cutting plan that would retain official output targets, first set in 2016, but would imply a production pullback because Saudi Arabia is overproducing by nearly 1 million barrels a day, The Wall Street Journal reported Friday. But OPEC officials said that while no decision had been made about how any reductions would be carried out, Friday’s price crash is turning them into a necessity.
Even, Russia, the top outside ally of the cartel, is showing increased flexibility in joining any new cuts. Moscow needs prices at only $53 a barrel to cover its spending but has said it favors them above $60 a barrel. Russian energy minister Alexander Novak said Monday that he plans to discuss a potential output cut in 2019 with domestic oil companies before the December meeting, the Prime news agency reported.
“Undoubtedly, we have discussed it, and we will discuss it,” Mr. Novak said, about talks with the state-run producers that have generally opposed any new reductions.
Crucially, OPEC officials say a production cut would be unlikely to benefit rival U.S. producers. That is because the American benchmark, the West Texas Intermediate, is now below the average $55-abarrel level needed by many producers to cover their costs.
On Friday, WTI traded for less than $51 a barrel at some points for the first time in more than a year and remained below $52 Monday, fuelled by a homegrown growth in inventories.
Now, falling prices could force shale drillers—who fracture underground rock formations to release the oil and gas trapped inside—to moderate their growth in booming areas such as the Permian Basin in Texas and New Mexico, and the Bakken region of North Dakota.
That could provide a powerful reason for the U.S. president to keep quiet, say cartel officials. “Trump wants the price to go down. But what about the break-even of shale,” said a Middle-Eastern OPEC official.
Middle Eastern cartel officials say, however, that the twopronged threats posed by Mr. Trump and shale oil mean they won’t push oil prices much above $70 a barrel. A Saudi oil official said while the kingdom will never officially admit it, “we want prices above $70 for sure.” “We need at least $80 to be honest but that would evoke more pressure from Trump,” he said.