It might seem disingenuous to pose such a question: Could Saudi Arabia, OPEC’s de facto leader, undo much of its public relations and media spinning work over the past year trying to convince global oil markets that indeed a much needed oil production cut is on the horizon and walk away from upcoming oil production talks?
Admittedly, the kingdom has become a master at market moving headlines and just a glimmer of hope that OPEC will cut or even cap production can send prices upward, even if it’s short lived.
The best example of this came in September on the sidelines of an energy forum in Algiers when the Saudis announced that a 1% production cut would be discussed in November.
Sure, a 1% production cut is marginal, while it was only an agreement to agree to talk in the future. No matter. Markets jumped. A week after the announcement, oil prices breached the $50/barrel price point for the first time since July. As usual, however, the upward tick in prices eventually stalled, with markets waiting breathlessly for either more market moving news from Saudi Arabia or OPEC, but longing for a real and substantial oil production cut.
Since then, more statements have been made followed by a corresponding reaction by markets. But its starting to look like OPEC might finally make a production cut, the first since 2008. Iran and Iraq, potential holdouts, might be coming around, while Nigeria and Libya will likely get a pass on having to cut production this time amid their own spiraling domestic problems that has impacted their ability to pump oil and pay the bills.
However, there does seem to be a limit on just how much OPEC can move markets at times without out actually doing something. On Wednesday, oil prices slid downward, despite Iraq, the cartel’s number two producer, announcing that it was on-board for a production cut.
Iraqi Prime Minister Haidar al-Abadi said Baghdad will “shoulder responsibility” for some of the production cuts planned by OPEC, the AP reported.
Saudis seek more
Now, it seems that Saudi Arabia is now seeking more than a just 1% cut, the number proposed in September. The kingdom is backing an effort to make the steepest oil-production cuts possible at OPEC’s meeting next week and to convince producers outside the cartel to help remove almost 2% of the world’s oil supply, The Wall Street Journal reported on Thanksgiving Day, citing people familiar with the matter.
Moreover, it could be more than just rhetoric. In late October, the Saudis were reportedly talking up an oil production cut as high as 4%.
Nevertheless, despite the resilience that stocks have displayed for much of this year, the recent pre-election market sell-off has cut the year-to-date gains in the S&P 500, Dow Jones and NASDAQ to a meager 2.2%, 2.3% and 1.0%, respectively, (through yesterday’s close). Thus, while I won’t be surprised if the market remains depressed through Tuesday or if suffers a brief but sizable knee-jerk sell-off shortly thereafter on a Donald Trump victory, I think that the final two months of the year will prove favorable overall for stocks.
But there could be a wrinkle in all of this. First, it’s the Russians. After Russian President Vladimir Putin recently gave lip service that there was indeed a need to cut production, the country is waffling again.
Russia said on Thursday it’s ready to freeze oil production at current levels, arguing that the offer amounted to a cut compared with next year’s plans. An output cap would mean Russia pumping 200,000 to 300,000 bpd less than planned in 2017, the country’s Energy Minister Alexander Novak told reporters in Moscow on Thursday.
However, OPEC had already asked non-OPEC members to cut production between 500,000 bpd to 800,000 bpd, according to various reports. With Russia, the world’s largest oil producer, now pumping 11 million bpd, a post-Soviet high, out of the equation, it effectively takes the bite out of any production cut that OPEC might agree on.
It’s dismal news as global oil markets remain saturated with supply, their highest in thirty years, in what can be called the worst oil market crash in at least a generation.
This brings us back to the question posed in the headline: Could Saudi Arabia walk away? While its anybody’s guess at this point, the answer is yes.
Russia waffles at production cuts
One reason would be lack of non-OPEC (Russian) cooperation just discussed. The logic is straightforward, why should the Saudis (the world’s second largest oil producer) carry more of a burden that the world’s largest oil producer (Russia) – which also ushers in discussions of competing for oil market share between the two producers in Asia and Europe.
Other factors that could cause the Saudis to balk at any oil production cut would be Iran and Iraq not stepping up to the plate, though in the past week, they have indicated that they would play along.
This scenario would likely play out if the Saudis ask for a larger cut that neither Iran nor Iraq could agree to. Both Iran and Iraq could agree to a lower production cut point while the Saudis agreed to a higher mark or they could simply walk away from the table.
Given the geopolitical and regional rivalries between Saudi Arabia and Iran, it’s possible that this factor alone could cause the whole process to come tumbling down. In April, the Saudis stopped oil production talks when Iran refused to attend the meeting.
However, if talks collapse there won’t be much end-of-year good news for global oil markets. The Paris-based International Energy Agency says that unless there is an oil production cut soon, oil prices will likely continue to fall in 2017.
On Friday, Saudi Arabia pulled out of talks with non-OPEC members including Russia just days ahead of the Vienna meeting due to disagreements about how to share the burden of supply cuts.
If OPEC can’t reach a deal at its meeting in Vienna, oil market mechanisms will take over , which will in time restore markets to equilibrium, but it won’t be pretty, since price points will dip into the high $30s again and possibly even lower.