SAUDI ARABIA, the kingpin of the Organisation of the Petroleum Exporting Countries (Opec), has taken a complete “U-turn”.
Until recently the kingdom was insisting that there was no possibility of any unilateral output cut by Riyadh until other major players including Russia in the extended Opec+ agree to a coordinated, combined move, with everyone contributing. For the last number of years, Saudi Arabia has been insisting; it was not ready to act as the global swing producer of the oil world — anymore. But all this changed — almost overnight.
Last Monday, while the Opec+ ministers met to decide their February output, Saudi Arabia warned against unleashing more barrels on a fragile market. Prince Abdulaziz bin Salman, the kingdom’s oil minister insisted that joint efforts to restrict production and manage the sharp fall in demand due to the coronavirus pandemic had to be maintained. “Do not put at risk all that we have achieved for the sake of an instant, but an illusory, benefit,” Prince Abdulaziz said. “Our job is not yet done.”
Russia, however, did not agree. During the meeting, as per reports, Moscow kept insisting on raising total production by a further 500,000 barrels per day (bpd). Due to the lack of any consensus on the issue, the Opec+ talks had to be extended until the next day.
The break provided the major stakeholders with an opportunity to discuss the scenario further, internally. Eyes but remained focused on Saudi Arabia and Russia. Markets too were on the edge, awaiting the outcome. The issue was: Will they increase their output in February as demanded by Russia or they would agree to keep the total output at current levels, as demand by Saudi Arabia?
This was a tough call. Even within its ranks, Opec needed to pay attention to the growing output from Libya, Iran, and Venezuela. Currently, all these three countries are exempted from output quotas.
Output hike could be disastrous, the Opec technical committee too had emphasised just before the meeting. “Amid the hopeful signs, the outlook for the first half of 2021 is very mixed and there are still many downside risks to juggle,” Opec Secretary-General Mohammad Barkindo underlined a day prior to the ministerial.
“Curbs on social and economic activity remain in place in a number of countries, and there is concern about the emergence of a pernicious new strain of the virus,” Barkindo said. He said the global economy could strongly rebound in the second half of 2021 but sectors such as travel, tourism, leisure, and hospitality could take years to reach pre-virus levels.
Even Iran also appeared cognizant of the changing global oil dynamics. On Jan 2, the Iranian news agency ISNA reported that Iran’s parliament had opted to lower the country’s oil export target from 2.3m bpd to 1.5m bpd, terming the original target impossible to achieve in the given circumstances. This was despite the fact that with the change in administration in the US, there are growing signs of some sort of rapprochement between Tehran and Washington and slackening of sanctions.
The Iranian Parliament’s Corporate Committee — in charge of finalising the proposed budget — was of the view that the export target of 2.3m bpd of export was unrealistic. However, the price base for the government calculations was kept unchanged at $40 per barrel.
Saudis but did not want to take any chance. Much was at stake for them. On Tuesday morning, surprising everyone, Saudi Arabia pledged to unilaterally cut its output by 1m bpd in February and March.
The deal was struck!
As per the agreement, most agreed to keep output steady at current levels. In view of their insistence on a hike, Russia and Kazakhstan were provided with a face-saving, allowing them to add a combined 75,000 bpd of output in each of those months. The increase in output agreed upon would barely register on the market, Iran’s oil minister Bijan Namdar Zanganeh was quoted as telling the media.
This must not have been an easy decision for Saudi Arabia. The Saudi oil minister Prince Abdulaziz bin Salman emphasised that the decision to cut the Saudi output was made unilaterally by Crown Prince Mohammad bin Salman himself, the de facto ruler of the oil rich kingdom.
With cash constraints growing on Riyadh, it opted to go for short terms gains. By keeping the markets balanced, crude prices would not go down further. But in the process, Riyadh has opted to push aside the market share battle — at least for the time being.
Despite not wanting to, Saudi Arabia is back in its role of the global swing producer.
Published in Dawn, January 10th, 2021