Riyadh and OPEC likely to ignore Trump’s entreaties and tighten supplies

Saudi Arabia can point to heightened US crude flows and the waivers as prime factors for the oil glut that has driven down prices.
Sunday 18/11/2018
Troubled waters. A fisherman pulls in his net as an oil tanker docks at the port in the Saudi city of Duba.                                                                                                                     (Reuters)
Troubled waters. A fisherman pulls in his net as an oil tanker docks at the port in the Saudi city of Duba. (Reuters)

Oil markets are being hammered over fears of oversupply, softening demand and — once again — a dustup between US President Donald Trump and OPEC is contributing to the price volatility.

Though Trump has routinely chastised and threatened OPEC because of his claim the cartel is deliberately pushing oil prices up, this time his rhetoric may be falling on deaf ears. Riyadh and others may decide to put their interests ahead of Trump’s after concluding that US actions have supported the sudden supply glut.

What set Trump off in his latest go-around with OPEC was a technical meeting in Abu Dhabi that considered oil market conditions and expectations and an announcement by Saudi Oil Minister Khalid al-Falih on the sidelines of the gathering.

Going into a November 11 joint ministerial monitoring committee (JMMC) meeting in Abu Dhabi, the OPEC+ alliance, which includes OPEC members and a handful of independent producers led by Russia, had been concerned about a price collapse and was digesting revised demand forecasts. OPEC has, for the fourth consecutive month, downgraded estimates for global energy demand for this year and 2019.

Oil prices have stumbled about 20% from 4-year highs in early October with prices of US benchmark crude West Texas Intermediate and UK benchmark crude Brent falling to less than $60 and $70 a barrel, respectively, on November 13.

The JMMC noted that “the dampening of global economic growth prospects, in addition to associated uncertainties, could have repercussions for global oil demand in 2019” and indicated that “new 2019 production adjustments” may be needed. Falih publicly stated that Saudi Arabia would reduce its oil exports by 500,000 barrels per day (bpd) in December.

The outcome of the JMMC meeting and Riyadh’s decision to cut output seemingly prompted Trump’s tweet: “Hopefully, Saudi Arabia and OPEC will not be cutting production. Oil prices should be much lower based on supply!”

That same day, Falih, speaking at the Abu Dhabi Petroleum Exhibition and Conference (ADIPEC), said that OPEC’s technical analysis suggested “there will need to be a reduction of supply from [the OPEC+ alliance’s] October levels approaching a million barrels [per day].”

The OPEC+ alliance has been cooperating for two years on adjusting production levels to prevent escalated oil prices that could damage the global economy or, on the flip side, correct a price collapse. The stage seems set for the alliance to agree to a 1 million bpd cut when they meet December 6 in Vienna to determine production levels for 2019.

Riyadh was pressed by the Trump administration earlier this year to boost output ahead of the expected loss of Iranian oil when US sanctions on the Iranian oil sector were to go into effect and to help ensure that US petrol prices weren’t rising ahead of the US midterm elections. Saudi Arabia and Russia reportedly reached a private bilateral agreement to raise output levels from September-December as the price of Brent was edging towards $80 per barrel.

Moscow hiked production levels to as high as 11.4 million bpd and Saudi Arabia recently ramped up its output to 10.7 million bpd. At the same time, however, US oil has been flooding the markets, with US output reaching a record 11.6 million bpd.

Riyadh and its producer allies may not have welcomed the timing of increased US production but they were even more displeased with the Trump administration’s granting waivers to eight of Iran’s crude customers — China, India, Greece, Italy, Taiwan, Japan, Turkey and South Korea.

The exemptions allow the buyers to purchase Iranian oil with the proviso that they work towards reducing those imports to zero. China, India and South Korea collectively are able to purchase as much as 860,000 bpd from Iran under the waiver.

Saudi Arabia, which has wholeheartedly backed the reintroduction of US sanctions on its Gulf nemesis and actively worked for months to blunt the anticipated loss of Iranian barrels from markets, can point to heightened US crude flows and the waivers as prime factors for the oil glut that has driven down prices.

Riyadh appears prepared to counter that excess with its own production cut first and then coordinating with its OPEC+ allies to ensure that prices recover.

Speaking at the ADIPEC conference, Falih said that before US sanctions were imposed on Tehran “fear and anxiety gripped the market,” referring to uncertainty about the size of lost Iranian supplies that helped push up prices. Now, he said, “we’re seeing the pendulum swing violently to the other side.”