Saudi Arabia keeps OPEC afloat

December 13, 2018

Waleed Shwaila

Last week, energy representatives from OPEC and non-OPEC governments flocked to Vienna, Austria to attend the 175th “Meeting of the OPEC Conference” and the 5th “OPEC and non-OPEC Ministerial Meeting”, which took place over a period of two days. Energy ministers and representing-delegations walked into the meetings with much uncertainty. It was clear that a global production cut of around a million barrels per day would do the trick in rebalancing the market, but it was also clear that not everyone was on board for such a decision.

In June, the Organization of Petroleum-Exporting Countries (OPEC) had agreed to increase global oil production by a million barrels per day. Several dynamic changes have impacted the market since then, and that ultimately resulted in the need for OPEC members, as well as non-OPEC producers, to meet once again and reassess the course-of-action. Analytical speculations and projections flooded the media as the meetings drew close, with the market begging for a hefty production cut; a reversal of the June decision. Well, now it’s all been said and done.

In an effort to stabilize the market, an agreement was reached last week to cut global oil production by 1.2M barrels per day. Discussions took longer than ever, resulting in multiple meeting delays and postponed press conferences. The extended duration of the negotiations could have been a result of differing points of view from member countries, as each had their own calculations and statistics to argue in favor of, not to mention each country’s desire to maximize their own benefits in the competitive market. But at last, the final consensus was for OPEC members to reduce production by 800,000 barrels per day, with non-OPEC members committing to a further 400,000-barrel reduction. The decision will be effective in January and will remain the course-of-action for an initial period of six months, with an evaluation meeting set for April.

Iran, Libya, and Venezuela were granted exemptions from the OPEC production cuts, due to their uncustomary political circumstances and lack of stability.

With the White House demanding a no-cut agreement, and Iran initially unwilling to agree on a joint OPEC-production cut due to their political situation, it was no easy task for the Kingdom of Saudi Arabia to rally all OPEC partners and rivals to an ideal agreement. As Bloomberg put it, it was a juggling act for Saudi Arabian Energy Minister Khalid Al-Falih. And although I would have to agree with that, he in fact ended up juggling his way through the meetings impressively and successfully, under the direction and supervision of the Custodian of the Two Holy Mosques King Salman Bin Abdulaziz and Crown Prince Muhammad Bin Salman. Thanks to the Saudi leadership’s efforts, the Kingdom of Saudi Arabia was triumphant last week in rewarding the oil market with further stability and peace of mind. The Kingdom of Saudi Arabia diligently carried OPEC through the tough meetings toward a positive outcome that is sure to both satisfy the global market and keep Trump’s disgruntlement at bay.

The drastic cut is sure to allow production to sway appropriately with the seasonal decline of demand, though rest assured that the likes of the Kingdom of Saudi Arabia and Russia are always prepared to pump more at any given time, if unforeseen circumstances arise.

Saudi Arabia along with others took the initiative to ensure limitations on market volatility, which proved to be the main objective of last week’s discussions. At the same time, OPEC prioritized meeting the expectations of consumers across the world. Here, the Kingdom exhibited courage and fulfilled its duty in doing what is right for the global market, regardless of what foreign political forces may have called for. Saudi Arabia, with the cooperation of member countries, proved that the OPEC is able to work with and dominate whatever challenges are thrown its way.

Furthermore, the Kingdom of Saudi Arabia does not base its oil-market decisions on political pressures, with the exception of unfortunate geopolitical crises potentially impacting the market. It is a guiding-principle of the Kingdom of Saudi Arabia to always safeguard the global market by ensuring sufficient supply. The Kingdom will always respond to a lack of supply, and as was proven last week, it will also respond righteously to an oversupplied market.

Russia, as well, played a key role in leading non-OPEC producers in pursuing an agreement with OPEC. Russian Energy Minister Alexander Novak undoubtedly plays a big role whenever these OPEC meetings come around, despite the fact that Russia is not an OPEC member. The European oil giant is always a mighty voice in the energy industry, and supplements the Kingdom of Saudi Arabia well during discussions, not to mention the great working chemistry between both sitting energy ministers.

Stability over price

For as long as I can remember, oil-producing giants have emphasized the importance of prioritizing market stability over oil prices. Saudi Arabia’s Energy Minister Khalid Al-Falih and his Russian counterpart Alexander Novak have both reiterated the “stability-over-price” mantra for years, yet never more so than now. The same goes for consumers. Stability in the oil market is sought after by all producing and consuming countries. There are differing preferences when it comes to oil prices, but the common desire for stability reigns supreme. Expect more of these claims in 2019.

The United States oil and gas market, as a whole, is growing at a remarkable rate and this has surely impacted the world market’s supply and demand, as well as limited prices. Expect further growth during 2019, and an increasing US significance in the global oil market. At the same time, Saudi Arabia and Russia continue to grow. There’s room for everyone. Yet, OPEC, which in total produces 40 percent of the world’s oil, should not allow US shale production to cut too deeply into the market share and unreasonably pressure the world market into decline.

Saudi Arabia’s numbers

The production rate for the Kingdom of Saudi Arabia was 10.7M during October 2018, with a jump to 11.1M during the month of November. At the current pace, it is projected that December will end with a production of 10.7M once again. Due to recently-planned allocations and the outcome of OPEC meetings, the Kingdom will be expecting to cut production by around half a million barrels, bringing Saudi Arabian production down to the 10.2M range. As usual, Saudi Arabia will be leading by example and handling the bulk of the global production slash.

OPEC’s 2019

The fact that the past few OPEC meetings have been tense and on the verge of collapse is not a good sign, but OPEC has delivered time and time again, regardless of tensions. OPEC continues to provide a platform of effective and efficient cooperation, no matter the hardships. With that being said, a growing US market and continued instability in Venezuela and Libya leaves us with much unpredictability ahead.

The writer is a Saudi political analyst specializing in foreign affairs and protocol. He may be reached at: waleedaasa@gmail.com. Twitter: @waleedalg

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