Saudi brinkman­ship aims to re­gain lever­age within OPEC

Kuwait Times - - BUSINESS -

Saudi Ara­bia is try­ing to reestab­lish some ne­go­ti­at­ing lever­age within OPEC by threat­en­ing to block an out­put cut­ting deal un­less other mem­bers share more of the bur­den. Saudi ne­go­tia­tors made a mis­take at the or­ga­ni­za­tion’s last meet­ing in Septem­ber by ap­pear­ing too eager to se­cure a deal, which has em­bold­ened other mem­bers to harden their own po­si­tions.

Now the Saudis are try­ing to push oth­ers into mak­ing con­ces­sions by rais­ing the prospect that if they do not there will be no deal, an out­come that would be worse for ev­ery­one.

For two years be­tween mid-2014 and mid-2016, Saudi Ara­bia took the hard­est line within OPEC, in­sist­ing it would only cut out­put if joined by all other OPEC and major non-OPEC pro­duc­ers. For rea­sons that re­main un­ex­plained, the Saudi po­si­tion shifted sig­nif­i­cantly be­tween the OPEC meet­ings in June 2016 and Septem­ber 2016, and the kingdom be­came much more in­ter­ested in reach­ing an agree­ment.

The shift may have been the re­sult of a change in oil min­is­ter, the con­tin­ued draw­down of the kingdom’s for­eign cur­rency re­serves, and the de­te­ri­o­rat­ing eco­nomic sit­u­a­tion at home.

It may also re­flect the pre­vi­ous strat­egy’s fail­ure to re­bal­ance the oil mar­ket within a rea­son­able time frame and the prospec­tive share sale in the na­tional oil pro­duc­tion com­pany. What­ever the rea­son, Saudi ne­go­tia­tors went into the last round of OPEC talks in Septem­ber de­ter­mined to ob­tain a pro­vi­sional agree­ment and will­ing to show enough flex­i­bil­ity to ob­tain it.

But by ap­pear­ing eager, al­most des­per­ate, for a deal, Saudi Ara­bia sig­nalled it wanted an agree­ment more than its major ri­vals within OPEC, Iran and Iraq, and its major out­side com­peti­tor, Rus­sia.

In re­sponse, all three have hard­ened their po­si­tions and re­sisted pres­sure to join Saudi Ara­bia in cut­ting their own pro­duc­tion. Rus­sia has of­fered a freeze dressed up as a cut from a planned in­crease in 2017. Iraq has hinted at a cut which re­ally ap­pears to be a freeze. Iran’s po­si­tion re­mains am­bigu­ous but it in­sists it will not limit its out­put.

OPEC mem­bers and ob­servers un­der­stand that in any re­al­is­tic deal, Saudi Ara­bia and its close al­lies the United Arab Emi­rates and Kuwait will do most of the real cut­ting.

Past ex­pe­ri­ence shows Saudi Ara­bia and its al­lies al­ways pro­vide most of the real re­duc­tions, with other mem­bers fre­quently cheat­ing on quo­tas. For an agree­ment to pro­duce a sig­nif­i­cant tight­en­ing of the sup­ply­de­mand bal­ance and lift oil prices, Saudi Ara­bia and its al­lies will have to con­trib­ute very large out­put cuts.

The mar­ket will not as­sign much cred­i­bil­ity to prom­ises of cut­backs by other mem­bers given their his­tory of non-com­pli­ance. The Saudis need to­ken cuts from other pro­duc­ers, or at least a cred­i­ble freeze, how­ever, to pro­vide them with diplo­matic cover for what is a hu­mil­i­at­ing climb down and to sell the deal to a do­mes­tic au­di­ence. — Reuters

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