Rashid Husain Syed is a Toronto-based journalist, consultant and energy analyst. For almost 25 years, he served as vice-president of a leading Saudi trading and consulting house.
With the recent OPEC output deal, oil policy in Saudi Arabia has taken a full U-turn. Under the stewardship of deputy Crown Prince Mohammed bin Salman, and his trusted lieutenant, Energy Minister Khaled Al-Falih, Saudi Arabia has formally given up on the battle for market share of crude.
For the deal to cut output to come together, the cartel's kingpin agreed to shoulder the lion's share of the reduction – about 486,000 barrels a day. And despite insisting all along that regional rival Iran should follow suit, it ultimately had to give up on that, too, allowing Tehran to boost production slightly from its October level.
Riyadh seemed desperate for a deal as it was no secret that much was at stake. The past two years have been painful times for OPEC members. As the U.S. Energy Information Agency notes, OPEC is set to earn only $341-billion (U.S.) from oil exports this year. That's down from $753-billion in 2014, and a record $920-billion in 2012.
The timing was also crucial. Prince bin Salman, the rising political star in Riyadh, has been trying to establish his authority, presenting himself as the engine of change, growth and success. With the economy in terrible shape, the status quo could have imperilled the success of his much-trumpeted "Vision 2030."
Saudi Arabia is on the verge of its first non-oil-sector recession in three decades. Public-sector spending is on retreat. Unpaid government invoices – resulting in major companies going into virtual bankruptcy – are shattering business confidence in the country. With public-sector employees receiving a direct cut in wages, consumer spending is heading south.
Low oil prices could also have jeopardized the plans to privatize part of Saudi Aramco. Riyadh has been expecting significant global interest in the Aramco IPO, and is expecting tens of billions of dollars from the offering. But with low oil prices, the proceeds from the IPO would likely have been significantly less than the target. Ongoing regional wars in Yemen and Syria were not only a major drain on Saudi finances, but the lack of success in both had the potential to dampen the political aspirations of Prince bin Salman. In a nutshell, Saudi Arabia needed money, and this forced Riyadh to swallow the bitter pill and accept the "big hit." The big question is, will it work? Analysts remain skeptical. Morten Frisch of the British-based Morten Frisch Consultancy says: "In the short term; the big winners are Russia, Iran, Iraq, Libya and Nigeria. With forward price curves 'flattened' considerably after the OPEC deal, big winners are also people having invested in stored crude oil, as positions in stored crude oil are now likely to be unwound. This will put downward pressure on oil prices.
"Big winners are also the North American shale oil producers. For them, Christmas came early. At the current price level for West Texas Intermediate (WTI), U.S. shale producers could increase production by about 1.5 million bbl per day, probably in fewer than 18 months. The critical factor will be the timely availability of hydraulic fractionation crews," Mr. Frisch notes.
Indeed, if OPEC is successful in throttling back its output, and prices get a boost as a consequence, that could induce idled rigs in Texas or North Dakota to start drilling again, boosting U.S. output in the process. This has the potential of bringing prices down.
Further, will Moscow stand by its words and reduce output? History is not behind Russia in this regard. Already, there are signs that Russia may enforce the agreed upon cuts from March only and not January. Concerns also persist about a number of regular OPEC "quota busters."
Former Saudi oil minister Ali Al-Naimi remains of the view that Saudi Arabia needed to continue with the battle for market share. "I have no idea why they want a reversal (of the policy). High price will definitely bring more crude to the market and OPEC will further lose (market) share," Financial Times reported him as saying.
The current spike in price may not be sustainable. In the end, OPEC could end up being a net loser.