Just three men now control oil prices
US, Russia and Saudi Arabia dominate supply, together producing more than OPEC, writes Julian Lee
The US, Saudi Arabia and Russia now produce more oil than OPEC combined. OPEC has lost what control of the oil market it ever had. The actions (or tweets) of three men — Presidents Donald Trump and Vladimir Putin and Crown Prince Mohammed Bin Salman — will determine the course of oil prices in 2019 and beyond. But of course they each want different things.
While OPEC struggles to find common purpose, the US, Russia and Saudi Arabia dominate global supply. Together they produce more oil than the 15 members of OPEC. All three are pumping at record rates and each could raise output again next year.
It was Saudi Arabia and Russia that led the push in June for the OPEC+ group to relax output restraints that had been in place since the start of 2017. Both subsequently jacked up production to record, or near record, levels. US output soared unexpectedly at the same time, as companies pumping from the Permian Basin in Texas overcame pipeline bottlenecks to move their oil to the Gulf coast.
These increases, alongside smaller downward revisions to demand growth forecasts and President Trump’s decision to grant sanctions waivers to buyers of Iranian oil, flipped market sentiment from fears of a shortage to concerns about a glut in the space of three months. Oil stockpiles in the developed nations of the OECD, which had been falling since early 2017, are rising again and likely to exceed their five-year average level when October data is finalised, the International Energy Agency says.
As oil prices have headed south, Saudi Arabia said it would cut exports by 500,000 barrels a day next month and warned fellow producers that they needed to cut
Bin Salman, Trump and Putin are calling the market shots. The prince may struggle to defend output cuts against a hostile Trump and an indifferent Putin.
about 1 million barrels a day from October production levels. That drew a lukewarm response from Putin and a swift Twitter rebuke from Trump.
Bin Salman needs oil revenue to fund his ambitious plans to transform Saudi Arabia, while avoiding unrest from those hurt in the process. The International Monetary Fund forecasts that the kingdom will need an oil price of US$73.3 a barrel next year to balance its fiscal budget. Brent crude is trading about US$5 below that, with Saudi exports trading at a discount to the North Sea benchmark. Prolonging output cuts for a third year is the only way he can realise the price he needs.
He will face more challenges from Putin and Trump. The Russian shows no great enthusiasm for restricting his country’s production again. Moscow’s budget is much less dependent on oil prices than it was when Russia agreed to join OPEC-led efforts to re-balance the oil market in 2016.
Putin may yet decide that maintaining his improved political relationship with MBS, as the Crown Prince is known, is worth a small sacrifice. But it’s not a foregone conclusion that Russia will agree to extend output cuts when producers gather in Vienna next month. Putin says oil prices of about $70 a barrel suit him “completely.”
The opposition from Trump will — naturally — be much louder and comes at a time when he and MBS are trying to preserve their political relationship, while American senators consider harsher sanctions on Saudi Arabia in response to the war in Yemen and the killing of dissident journalist Jamal Khashoggi.
A bigger US threat to Saudi plans than Trump’s tweets will come from the Texas oil patch. American producers have added a volume equivalent to the entire output of OPEC’s Nigeria in the past 12 months. Their production could reach 12 million barrels a day by April, according to the Department of Energy. That’s six months sooner than it was forecasting just a month ago.
Saudi Arabia will have to risk Trump’s wrath, Putin’s indifference and a booming US shale industry if it hopes to balance the oil market in 2019.