Oil: Some Method to the Madness

Published on April 4, 2016
SGH Insight
It is our strong sense, however, that despite the young Deputy Crown Prince's reported remarks last week, there is no shift underway in Saudi oil policy away from the oil output freeze and efforts to stabilize oil prices at a higher level. The Kingdom will be attending the Doha meeting on April 17, and we believe it will in the end accept an Iranian exemption to the oil output freeze. The Kingdom, as we wrote previously is still seeking an oil price equilibrium of around $40 to $50 a barrel by the end of the year.
Market Validation
(Bloomberg 4/7/16)
Oil reversed losses amid speculation about whether an accord can be reached at a meeting between OPEC members and Russia on freezing oil production.

Futures rose as much as 1.2 percent in New York after slipping 1.3 percent Thursday. The meeting is set to take place April 17 in Doha to discuss freezing output to stabilize the markets. Saudi Arabia has said it will only agree if it’s joined by other suppliers including Iran, while Kuwait said a deal can be done without Iran’s support.

Oil prices remain under pressure today after Friday’s sharp selloff as doubts continue to linger over Saudi oil policy in the wake of the remarks by Saudi Deputy Crown Prince Mohammed bin Salman that Saudi Arabia would be reluctant to continue with the oil output freeze without Iran’s participation.

*** It is our strong sense, however, that despite the young Deputy Crown Prince’s reported remarks last week, there is no shift underway in Saudi oil policy away from the oil output freeze and efforts to stabilize oil prices at a higher level. The Kingdom will be attending the Doha meeting on April 17, and we believe it will in the end accept an Iranian exemption to the oil output freeze. The Kingdom, as we wrote previously (see SGH 3/9/16, “Oil: Moscow “Freeze” Meeting is On”) is still seeking an oil price equilibrium of around $40 to $50 a barrel by the end of the year. ***

*** It is our understanding that, while perhaps clumsily handled, Deputy Crown Prince Mohammed was concerned that oil prices were rising too high and too quickly, risking renewed volatility. And closer to home, a continued sharp rise could also take some of the internal pressure off of the far-reaching domestic economic reforms he is aggressively pursuing to modernize the Saudi economy. The Deputy Crown Prince, in effect, could be using a low oil price environment to push through unpalatable domestic reforms rather than a confrontation with Iran on oil market share per se. ***

High Risk Remarks

Referring to Iran’s participation in the oil output freeze, in that sense, was a means to an end for Prince Mohammed to cap the oil price surge of recent weeks. It is nevertheless a shot across the bow at Tehran, and the Kingdom still intends to press for an Iranian commitment on how its increased output will be staggered through the coming months until new quotas can be negotiated at an OPEC meeting later this year.

The reports today that the Saudis were banning oil tankers carrying Iranian cargoes from stopping in at Saudi or Bahraini ports as well would be just one aspect of the negotiating pressure being put on the Iranians to commit to a staggered output plan.

To say that the efforts by the Deputy Crown Prince to micro-manage oil prices in the near term is risky would be an obvious understatement. It may have likewise set off reactions by the Iranians that would be impossible to control or predict. His remarks and the hit to oil prices and the doubts they raised over the viability of the oil output freeze has likewise infuriated key OPEC allies, including hosts Qatar of the April meeting, and not to mention the Russians, who are the key linchpin to the oil output deal with the Saudis.

The Russians are also working behind the scenes with a fairly heavy hand to bring about necessary political compromises from Syria’s President Bashar al-Assad to end the Syrian civil war. It is a goal the Saudis share as a high priority regional foreign policy, but Moscow could now freeze those efforts.

The reversal in oil prices has also had an immediate effect on the Saudi stock market when it opened on Sunday, with sharp price falls on the Tadawul as well as across the Gulf stock exchanges. Saudi stock prices stabilized today, but it is understood that Saudi government agencies such as the Public Investment Fund were stepping in with purchases.

But it is probably worth noting that Deputy Crown Prince Mohammed conducts many of his meetings late at night, and the Bloomberg interviews began at 11pm, and after a brief break for a very late dinner, were finally brought to an end around 4am. And perhaps because of the late into the night session with the Western reporters, it is also noteworthy that Oil Minister Ali al-Naimi was not present.

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