How Saudi Arabia, UAE will stabilise the oil market

Riyadh and Abu Dhabi recognise that sustained prices at that level could prove harmful to the global economy and erode oil demand.
Sunday 28/04/2019
A general view of Saudi Aramco’s Ras Tanura oil refinery. (Reuters)
Crucial to stabilise the market. A general view of Saudi Aramco’s Ras Tanura oil refinery. (Reuters)

The Trump administration’s decision to ratchet up sanctions on Tehran by denying waiver extensions to eight countries that had been buying Iranian crude can only work with the backing and cooperation of Saudi Arabia and the United Arab Emirates to avoid an undersupplied oil market and spiking crude prices.

US President Donald Trump alluded to that support in a tweet April 22: “Saudi Arabia and others in OPEC will more than make up the Oil Flow difference in our now Full Sanctions on Iranian Oil.”

US Secretary of State Mike Pompeo indicated that Saudi Arabia and the United Arab Emirates, along with the United States, would ensure an “appropriate supply” of oil to meet any gap.

However, the circumstances are different than the lead-up to Washington renewing sanctions on Iran in November when the two Gulf producers and other crude suppliers, including Russia, turned up their oil taps only to feel hoodwinked by learning that the Trump administration had granted waivers — significant reduction exceptions (SREs) — to Tehran’s top crude buyers.

Riyadh and Abu Dhabi are making it clear that cooperation in replacing Iranian oil exports will be on their terms, not the American president’s.

Saudi Oil Minister Khalid al-Falih struck a cautious tone in comments regarding the end of the waivers, saying: “In the next few weeks, the kingdom will be consulting closely with other producing countries and key oil-consuming nations to ensure a well-balanced and stable oil market.”

Falih later stressed that, because the oil market is “well-supplied,” Riyadh didn’t perceive an urgency in boosting production in May, when SREs to eight nations expire. “We will be responsive and we think there will be an uptick in real demand but certainly we are not going to be pre-emptive and increase production,” he said.

UAE Oil Minister Suhail al-Mazrouei made a similar point earlier in April at a conference in Abu Dhabi. Referring to the push by some OPEC and independent producers to boost output ahead of the United States’ reinstatement of sanctions on Tehran late last year, Mazrouei said: “I think we have learned the lesson… We will not jump the gun, pre-produce the volumes that are not required yet.”

The two Gulf powerhouses are committed to doing their part to upend Tehran’s economy and ideally marginalise its influence in the greater region but Riyadh and Abu Dhabi know the oil market is tighter and more vulnerable than six months ago, the result of slowing global demand, rising crude inventories, less Venezuelan and Iranian oil available because of American sanctions and the potential for Libyan exports to be disrupted by the country’s civil conflict.

Saudi Arabia and the United Arab Emirates have been instrumental in the OPEC+ alliance that has withdrawn as much as 1.2 million barrels per day (bpd) of crude from the market over the last four months, a major contributor to a tightening of global oil supply. Saudi Arabia has assumed the lion’s share of the cuts agreed to by the alliance, pumping well below its assigned quota of 10.31 million bpd at 9.79 million bpd in March.

Saudi Arabia and the United Arab Emirates could collectively boost oil output by as much as 1.5 million bpd reasonably quickly. That volume would handily accommodate the loss of Iran’s remaining 1 million bpd of exports, although the United States is unlikely to see Iranian crude sales drop to its “zero” target goal.

However, the two Gulf producers would be unable to maintain that higher output indefinitely and it would greatly diminish global spare production capacity, a critical factor should unexpected crises arise.

Saudi Arabia and the United Arab Emirates have not been upset with the trajectory of oil prices in recent months that have seen oil prices climb by $20 a barrel, moving the price of UK benchmark crude Brent to $74-$75 a barrel and the price of US benchmark crude West Texas Intermediate to $65-$66 a barrel.

While revenues from $80-plus a barrel oil would be preferable to satisfy domestic budget needs, Riyadh and Abu Dhabi recognise that sustained prices at that level could prove harmful to the global economy and erode oil demand but the Saudis and Emiratis also don’t want prices to fall much below current levels.

The International Energy Agency has warned “that with global economic growth increasingly fragile, consumers and producers should take steps to avoid higher oil prices that will prove painful to all alike.”

Given that Saudi Arabia and the United Arab Emirates are being tasked with replacing Iranian oil and preventing a major oil market disruption, expect Riyadh and Abu Dhabi to ignore pressure from Trump on moving precipitously while they assess market conditions, determine their best course of action and protect their financial self-interests.