The oil kingdom is back in the saddle.

If recent news reports are to be believed, the Saudi role in the oil market is growing. In a bid to meet President Trump’s insistence on cooling the oil markets, Riyadh is striving to keep oil markets on a tight leash - at least until the mid-term elections in the US.

Early this year, Saudi Arabia was reportedly aiming at $80 a barrel mark so as to bridge its fiscal deficit and achieve the $2-trillion price tag for its oil giant Saudi Aramco. However, things went awry, when President Trump intervened, insisting upon the Organisation of Petroleum Exporting Countries (Opec) to bring down the crude prices.

President Trump criticised Opec harshly - for keeping oil prices “artificially very high”, and in a later tweet in July, he demanded the organisation to “reduce pricing now!”

For the sake of geopolitics, Riyadh could not have afforded to lose Trump administration’s support, even if it meant paying a price in terms of lower oil prices. Now reports say, going against its original objective, Riyadh is now striving to keep oil prices, somewhere between $70-80 a barrel.

Some believe the unofficial $70-80/barrel Saudi price target for oil may have been the reason behind Saudi Arabia telling the market last week that it had raised production in August. The leak generated curious looks. It was sooner than the Saudis would have typically leaked such information, an industry source told Reuters.

And returning the favour, the Trump administration has reportedly agreed to let Riyadh off the hook after the mid-term November elections. In a recent analysis, S&P Global Platts senior writer, Herman Wang, indicated that Trump’s pressure on Riyadh to keep a cap on prices could dissipate after the elections. Interesting?

But this also brings forth the issue of spare capacity. How much could Saudi Arabia bring online and on a short notice? Markets remain sceptic. The mid-term elections in the US are scheduled to take place the next day after the full sanctions on Iran get into effect. As per S&P Platts, that could mean some 1.4mbpd of Iranian crude off the global markets.

Can Saudi Arabia meet that challenge and plug the entire gap?

Riyadh says it can.

In June, energy minister Khalid Al-Falih categorically said that it can cover all lost Iranian supply after the sanctions. Not everyone agrees.

Irina Slav writing for Oilprice.com quoted Amrita, Senator of Energy Aspects as saying, “While Saudi Arabia has the capacity in theory, yet, it takes time and money to bring these barrels online, possibly up to 1 year.”

Gary Ross of S&P Global Platts was even more blunt: “The Saudis do not have 2mbpd of spare capacity as it would imply production of 12mbpd (plus). They can likely produce a maximum of 11m and even that will be running their system at stress levels.”

Saudi crude output touched 10.424mbpd in August, reports said. And if Ross is to be believed, the spare capacity available with Riyadh is around 0.5mbpd and not 1.7-2mbpd - as required.

And in case it becomes real tight, markets may get berserk. That might upset Trump administration, despite the reported ‘tacit agreement between Riyadh and Washington.’ Some feel this could force the Trump administration to invoke, “No Oil Producing and Exporting Cartels - Nopec” legislation.

The House of Representatives introduced a version of Nopec bill in May. The Senate has also revived legislation which would amend the Sherman Antitrust Act of 1890. The law was used more than a century ago to break up the oil empire of John Rockefeller. The threat is definitely there.

Opec is keeping a close eye on developments. It has already hired former Solicitor General Ted Olson as a lobbyist to campaign against the possibility of a legislation that could open up the producers’ group to antitrust lawsuits.

The Saudi embassy contracted with Olson’s law firm, Gibson, Dunn & Crutcher LLP, to develop a white paper opposing the “No Oil Producing and Exporting Cartels Act” legislation. As per press reports, it will also prepare a legal analysis of the bill and write an op-ed against it.

For the time being, Saudis seem to play a key role is keeping crude markets on a tight leash, making President Trump happy, yet, at a cost. Would they continue? For how long? Too many ifs - all around.

Indeed, there are no permanent friends or foes in the realm of politics. And the crude world is no exception.

Published in Dawn, September 16th, 2018