Flooding the market
Within six weeks, Saudi Arabia has gone from advocating higher oil prices to trying to stop the rally at $80 a barrel.
The world’s largest oil exporter just made quite a policy swerve. Within six weeks, Saudi Arabia has gone from advocating higher prices to trying to stop the rally at $80 a barrel.
The U-turn scrambled the outlook for oil markets, hit the share prices of oil majors and shale producers and set up a diplomatic wrangle with other members of the Organization of Petroleum Exporting Countries.
What changed? The supply threats posed by the re-imposition of U.S. sanctions on Iran oil exports earlier this month and the quickening collapse of Venezuela’s energy industry are both part of the answer, but they’re secondary to Donald Trump. On April 20, the president took to Twitter to lambaste the cartel’s push for higher prices. “Looks like OPEC is at it again,” he tweeted. “Oil prices are artificially Very High!”
Trump’s intervention gave typically strident voice to a concern held more widely in the U.S. and other consuming countries: oil’s rally from less than $30 in early 2016 to more than $80 this month risked becoming a threat to global economic growth.
On Friday, Saudi Oil Minister Khalid al-Falih responded, saying his country shared the “anxiety” of his customers. He then announced a shift in policy that all but gave a green light for a market sell-off, saying OPEC and its allies were “likely” to boost output in the second half of the year.
“The tweet moved the Saudis,” said Bob McNally, founder of consultant Rapidan Energy Group in Washington and a former White House oil official. “The message was delivered loud and clear to Saudi Arabia.”
After al-Falih’s comments, made following a meeting with his Russian counterpart in St. Petersburg, saw crude drop more than $3 to below $67 a barrel in New York on Friday. The bullish tone of recent market chatter, increasingly punctuated with talk about oil prices climbing past $100, $150 and even $300, suddenly looks overdone.
It wasn’t just the U.S. Other major buyers of Saudi crude also put pressure on Riyadh to change course, albeit a little more diplomatically than Trump. Dharmendra Pradhan, the Indian petroleum minister, said he rang al-Falih and “expressed my concern about rising prices of crude oil.”
Tweet brings response
OPEC officials were in a meeting at the opulent Ritz-Carlton hotel in Jeddah on Saudi Arabia’s Red Sea coast when Trump tweeted his views and they immediately saw it as a significant intervention.
“We were in the meeting in Jiddah when we read the tweet,” OPEC Secretary General Mohammad Barkindo said on Friday. “I think I was prodded by his excellency Khalid al-Falih that probably there was a need for us to respond,” he said. “We in OPEC always pride ourselves as friends of the United States.”
There are also indications that Russia, whose decision to participate in OPEC’s cuts helped turnaround the oil market, has decided the rally has run far enough.
“We’re not interested in an endless rise in the price of energy and oil,” Putin told reporters in St. Petersburg on Friday. “I would say we’re perfectly happy with $60 a barrel. Whatever is above that can lead to certain problems for consumers, which also isn’t good for producers.”
OPEC and its allies will gather in Vienna for a policy meeting on June 22 to hammer out a deal. While al-Falih and Russia’s Novak have indicated that output will most likely increase, the details — how many barrels from which countries — are still a question mark.
“In an environment of low inventories and rising geopolitical outages, raising some supply is prudent,” said Amrita Sen, oil analyst at Energy Aspects.
Oil producers are debating an increase ranging from 300,000 barrels a day at the low end, backed by Gulf producers including Saudi Arabia, and a larger increase of about 800,000 barrels a day favored by Russia, a person familiar with matter said on Friday.
“It’s too early now to talk about some specific figure, we need to calculate it thoroughly,” Novak said.