US-OPEC polemic over oil prices reflects different strategies
Riyadh’s apparent desire to see global crude prices average $10-$30 a barrel higher than current levels to support its ambitious economic agenda could have an adverse effect on the otherwise warm relationship that has been carefully fostered between the regime of Saudi King Salman bin Abdulaziz Al Saud and the Trump administration.
With crude prices reaching levels not seen since 2014, US President Donald Trump has taken the Saudi-led OPEC to task in one of his infamous tweets, while disregarding the fact that US oil producers have been a primary beneficiary of rising crude prices.
A coordinated effort by Saudi Arabia, other OPEC members and independent oil producers, including Russia, to withhold some 1.8 million barrels per day (bpd) of crude from the markets since January 2017 has pushed oil prices up $20-$25 a barrel, with British crude benchmark Brent hitting a 3-year high of $74.75 a barrel on April 19.
That price level came the same day that OPEC members and independent producers met in Saudi Arabia to assess their coordinated output reductions, which are expected to continue through 2018 and potentially through 2019.
Ahead of that Jeddah gathering, Saudi Oil Minister Khalid al-Falih suggested that the global economy had the “capacity” to accommodate higher oil prices, saying: “I have not seen any impact on demand with current prices. We have seen prices significantly higher in the past — twice as much as where we are today.”
Falih also argued that OPEC never has a price target, saying: “Prices are determined by the market.”
Both Falih and Russian Oil Minister Alexander Novak signalled that, while they were pleased with the results of the collaboration between OPEC and Russia and other producers, there was more work to be done. Novak claimed that producers participating in the reduction agreement “need to extend [the] partnership” through next year.
Whether it was Brent hitting a 3-year high or the comments made by the two influential oil ministers or a combination of both, Trump sounded off on OPEC on April 20 for manufacturing “artificially” high oil prices. The US president tweeted: “Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!”
Falih, responding to Trump’s tweet, was quoted as saying that there is “not such a thing as artificial prices.”
In pushing for more robust oil prices through production restraint, OPEC has sought to shrink global oil stocks to 5-year levels and see oil demand and supply balanced — goals that are close to being reached. Trump appeared to be adopting a populist tone in his tweet to appeal to his core base by blaming OPEC and other producers for ramping up international oil prices, which has driven up domestic gasoline prices.
However, those same elevated oil prices enabled US shale producers to expand their crude output. US oil production has surpassed Saudi oil output and could eclipse Russia as the largest global oil producer. Total US oil production is expected to average 10.7 million bpd in 2018, an average of 1.4 million bpd higher than 2017 levels.
Also built into recent oil price increases are factors such as market uncertainty about whether the Trump administration will withdraw from the Iran nuclear deal, the collapse of Venezuelan oil production and a potential US embargo on Venezuelan oil imports and sustained friction between geopolitical rivals Saudi Arabia and Iran.
Speculation has emerged that the Saudis are privately mulling oil price targets ranging from an average of $80 a barrel to $100 a barrel, which would certainly require collaborative production cuts to continue indefinitely. A chief reason that the timing of the much-anticipated initial public offering (IPO) of Saudi state oil giant Saudi Aramco has slipped from the fourth quarter 2018 into 2019 is that the Saudi government wants dramatically higher oil prices to boost the valuation of the firm in advance of its limited share sale.
While the IPO is a critical component of the economic revamping programme known as Saudi Vision 2030, Riyadh also wants loftier oil prices to cover large-scale budget needs, including a coffers-draining war in Yemen and the cost of implementing economic reforms.
Pushing oil prices up excessively could have global economic implications that could collapse in demand and prices to crater.
For King Salman’s government, the questions will be how to ensure cooperation with fellow OPEC members and independent producers to elevate oil prices substantially higher, how to avoid hitting a price threshold that causes the global economy to go haywire and whether Riyadh is willing to risk the deeper wrath of a mercurial American leader as it addresses its economic challenges.