With today’s modest upward turn in crude prices, there are indications Saudi policymakers are eyeing ways to lend support to stabilizing oil prices, sensing a near bottom to the renewed plunge in crude oil.
*** While Saudi Arabia has no intention of pivoting away from its current policy to maximize output and market share, Saudi policymakers are willing, however begrudgingly, to work behind the scenes in something of a tit-for-tat support to oil prices as Iran attempts to bring additional crude to market with a minimum of price disruption. ***
*** The Iranians have already indicated they will not rush their crude to market, or to even move the barrels in storage too quickly, instead phasing in the additional supply to the global oil market through the course of this year, and turning to their new access to their foreign reserves cash that had been frozen during the sanctions to meet immediate budget needs. ***
*** The Saudi thinking is to match Iranian prudence in returning to the market with their own verbal interventions or perhaps even a temporary trim in output for “maintenance” purposes or in response to a modest decline in domestic energy demand after the subsidies were lifted. There may also be Saudi and Iranian coordination, to some extent, in higher oil exports to China in the wake of Chinese President Xi Jinping’s recent visit to both Riyadh and Tehran. China will increase its crude imports from both countries to build inventories at the current low prices (See SGH 1/19/16, “Oil: China to Lower Production, Raise Imports”). ***
The “interventions” to put a bottom to the oil markets would operate much like the G7 central bank interventions in the heyday of G7 activism in mid-1995 to support a strong dollar policy: timing the verbal and actual cash interventions to support an uptick in the direction sought rather than trying to stop a downdraft with massive, mostly wasted purchases, as they did in 1994. In this case, the Saudi support would follow Iranian efforts to take it slow in bringing oil to market and, above all, timed to lend some support to upticks in crude oil prices. The Saudis, in other words, will push on an open door if they are confident the market is tightening.
Tactical, Not Strategic
To be clear, the Saudi approach is tactical, not a strategic shift in its current oil policies to maximize output and market share. There will be no return to its previous role as the “swing producer” to force an equilibrium in the supply and demand balance in the global oil markets. And that is mostly because it no longer has the room to take up that kind of role as it did in the past when the Kingdom could swing its output by several million barrels per day.
For one, Riyadh obviously needs the oil revenues like all the other oil producing states. But there is also more to the strategy in terms of its domestic economic needs. Saudi Aramco needs to deliver nearly 2.8 million bpd to meet the domestic energy demand, compared to a fraction of that in the swing producer era. Crucially, the Kingdom also needs a maximum output for the associated gas that feeds its strategic diversification from the dependence on crude oil exports to new petrochemical and other downstream revenue streams.
And what’s more, the intended strategic takeaway from the budget announced in late December was the intention to deepen economy’s resilience for a near term extended period of low oil prices (see SGH 1/15/16, “Saudi Arabia: Riyadh’s Strategic Gambit”): not only was budget spending slashed by 13%, much of it was through the cuts in energy subsidies that will continue to be phased out to leave the Saudi domestic users paying close to or at international market levels.
Revenues will be transitioned from the high reliance on crude oil exports to more non-oil sources, be it petrochemical sales, or perhaps someday, a sales tax, at least as far as the Al Saud can push in that direction without demands for greater political participation.
No Ceding “Victory” to Tehran
The Saudi decision makers likewise do not want to cede a “victory” to the Iranians in stepping back from its current oil policy stance. On this there is no light between the views of Deputy Crown Prince Mohammed bin Salman or Crown Prince Mohammed bin Naif, not to mention King Salman, nor do they see the need to rein in oil output when they believe they are on the cusp of victory in undercutting the higher cost oil producers and the US shale companies.
There are immense market share advantages in running such an efficient, well-managed company like Saudi Aramco, and they are not about to give back market share for the sake of OPEC unity or even higher crude prices entirely at their expense. The Saudis are veterans at the politics of the oil market.
So yes the Saudis give little credence to the prospects of a successful emergency OPEC meeting, or even bothering to show up for that matter, and they have no intention to pivot away from their current strategic direction in its oil policies.
But there is nevertheless room on the margin to adjust its verbal messaging to the markets and even to tweak its actual oil production for defined short term tactical goals of allowing the Iranian oil to enter into the international markets with a minimum of price disruption and to help put a bottom to the fall in oil prices – even as they compete to maintain overall market share.