Dire Saudi options to lift oil prices
• Current policies have little chance of delivering what the country needs
Saudi Arabia’s new energy minister, Prince Abdulaziz bin Salman, faces a series of fairly bleak options as the world’s largest exporter of crude oil tries to engineer higher prices amid a faltering global economy beset with geopolitical risks.
So far the word from the Saudis is that the appointment of one of the king’s sons does not imply a reset of the current policies being pursued. This means that, for now at least, the Saudis will stick to their output cutting agreement with the rest of the Opec cartel and allied producers such as Russia.
But Abdulaziz will know, as a highly experienced energy leader, that the current policies are not exactly working, and worse than that, have very little chance of delivering the higher prices his country needs.
Saudi Arabia needs crude prices at about $80 a barrel, about $20 above current levels, to balance the government budget, while higher prices will
also help boost the valuation of state oil company Saudi Aramco ahead of a possible initial public offering in 2020.
Opec and its allies agreed in November 2017 to restrict output in a bid to arrest falling prices, and have extended that deal, but the problem for the exporters’ club is that their efforts have largely been in vain.
While crude prices did gain in the months after the initial action by Opec and its allies, they only briefly managed to top $80 a barrel in October 2018, plunged to just above $50 by the end of 2018 before recovering to about $75, and meandering to the current level of $62.08 for benchmark Brent futures.
If the aim of the Saudis and the other producers restricting output was to drive prices to a sustainable level at about $80, they have failed. The chances that they can succeed look slight in the short to medium term, especially since higher prices merely act to incentivise other producers outside the deal, notably the US, Canada and Brazil, to ramp up their output.
Part of the problem for Opec and its allies is that producers in North America have been successful in driving down the cost of production in recent years, Chris Midgley, head of analytics at S&P Global Platts, told the annual Asia Pacific Petroleum Conference (Appec) in Singapore on Monday.
This means that where some US shale and Canadian oil sands producers used to need prices of $70 a barrel to incentivise new production, they can now bring new crude to the market at much lower prices.
In some ways, this serves to cap just how high crude oil can rise in the current demand situation, and while an exact level is hard to pin down, the price action in Brent over the past two years suggests that prices above $70 will provoke a fairly rapid supply response.
This places the Saudis in the unenviable position of having to cut more and more output and surrender market share in order to keep prices buoyant, but failing to raise them as high as they would desire.
The Saudis probably are not yet at the point where they may once again try to chase volume and say to hell with the price level, but the calculations must get being made.
Saudi Arabia’s seaborne exports of crude have been below 7-million barrels per day (bpd) since February, and were at 6.58-million bpd in July, says Refinitiv Oil Research.
In recent years, the most the Saudis have exported by tanker is 7.6-million bpd, implying they have at least 1-million bpd of production they could add into global markets at fairly short notice. Selling 7.5-million bpd at $50 a barrel delivers only slightly less revenue than selling 6.5-million bpd at $60.
Of course, there is no guarantee that crude prices would hold at about $50 a barrel if the Saudis raised exports, as presumably other
THEY ARE HAVING TO CUT MORE AND MORE OUTPUT AND SURRENDER MARKET SHARE IN ORDER TO KEEP PRICES BUOYANT
producers in the current output deal would feel they could ramp up their shipments too.
One of the buzzwords at this year’s Appec, the oil and gas industry’s largest Asian event, was “uncertainty,” with several speakers focusing on the effect of geopolitical tension involving US sanctions on Iran and Venezuela, the trade dispute between the US and China and even the Brexit imbroglio.
These are events largely beyond the control of the new Saudi energy minister, but it seems that for now the risks to global growth from the trade dispute outweigh the risks to oil supply from lower shipments from Iran and Venezuela.
He will also have to try and manage the complex web of relations between the world’s dominant three oil producers, his own country, the US and Russia, as well as how they interact with the world’s firstand third-biggest crude importers, China and India.
For this reason Abdulaziz’s least negative option is to keep trying to hold the outputrestricting deal together, and hope global trade tensions ease over the medium term.