Which factors can push Saudis to cut crude output?

Baku, Azerbaijan, Nov.13

By Leman Zeynalova – Trend:

While Saudi Arabia is researching the effects of a break-up of OPEC, this isn’t currently on the table and a sustained unilateral cut in output is highly unlikely, UK-based Capital Economics consulting company said in its report obtained by Trend.

The company analysts believe that Saudi Arabia’s push for a fresh round of oil output cuts isn’t a done deal and a sustained unilateral cut is unlikely.

Even so, it adds to the evidence of a more erratic approach to oil policy under Crown Prince Mohammed bin Salman, according to the report.

“Comments from this weekend’s meeting between OPEC and other major producers suggest that policymakers are increasingly concerned by the recent fall in oil prices. OPEC’s de facto leader, Saudi Arabia, floated the idea of fresh oil output cuts – Oil Minister Khalid al-Falih said that after producing 11 million barrels per day in November, the Kingdom would lower its supply by 500,000 bpd in December,” said Capital Economics.

At this stage, the consulting company thinks there are three key points worth making.

“First, it’s not clear whether an output cut has the support of all OPEC and non-OPEC producers.

Russia’s oil minister suggested that he was less concerned about oversupply in the oil market next year. While Saudi Arabia is researching the effects of a break-up of OPEC, this isn’t currently on the table and a sustained unilateral cut in output is highly unlikely,” said the company.

Second, the report says that the comments from Saudi Arabia provide further evidence of more erratic policymaking.

“During Ali al-Naimi’s time as oil minister from 1995 to 2016, the Kingdom earned a reputation for taking a measured and steady approach to oil policy. Policy changes were slowly revealed to the market and only when they had been signed off by the rest of OPEC. But Crown Prince Mohammed bin Salman’s ascendance has coincided with a shift in the Kingdom’s oil policy approach. Policy now appears to be increasingly driven by short-term movements in oil prices – talk of output cuts comes just six months after OPEC agreed to raise production to temper rising oil prices – rather than consideration of the country’s long-term position in the oil market,” said Capital Economics.

This erratic approach makes it more difficult to predict shifts in Saudi oil output and thus the implications for GDP growth, according to the report.

Third, the company analysts believe that the response from Saudi policymakers is a clear sign that they want to keep oil prices within a range of $70-80 per barrel. “That would be enough to keep the current account position in surplus and thus ensure that pressures on the dollar peg are muted.”

“But as we’ve noted before, Saudi Arabia’s influence over the oil market is waning. In particular, the floor for oil prices is now heavily influenced by the break-even price of US shale production, which has come down significantly in recent years. Even if Saudi takes action to support prices in the near-term, this could ultimately prove to be in vain if it encourages output from other sources to be ramped up.”


Follow the author on Twitter: @Lyaman_Zeyn

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