Saudi Arabia has been signaling for weeks that it is and will be doing whatever it takes to rebalance the oil market by slashing exports and pumping well below its quota under the OPEC+ deal—despite US shale’s persistence.
Yet, while neither the Saudis nor OPEC would officially admit that they are aiming for higher oil prices or a specific price of oil, the combined efforts of the OPEC/non-OPEC group to withhold 1.2 million bpd of supply are targeting a tighter market—and higher oil prices.
Even if higher oil prices are indeed helping U.S. shale producers to pump oil at record levels, OPEC’s largest producer and de facto leader Saudi Arabia reportedly prefers higher oil prices rather than hanging onto its market share.
The Saudis are aiming for at least $70 a barrel Brent Crude because the Kingdom’s budget needs these higher prices, industry sources familiar with Saudi Arabia’s oil policies tell Reuters. And they may need even higher than that.
According to estimates from the International Monetary Fund (IMF), the Saudis need much higher oil prices for a budget breakeven in 2019—at $80-85 a barrel, Jihad Azour, Director of the Middle East and Central Asia Department at the IMF, told Reuters last month.
Oil at $80, however, is sure to draw harsh criticism from U.S. President Donald Trump, whose oil price ‘tolerance threshold’ appears to be Brent above $65. The latest tweet aimed at OPEC at the end of February called on the cartel “to take it easy”, when oil prices were roughly where they are now—at Brent around $66 a barrel.
Oil at $80 would also be the beginning of demand destruction at a time when economists and markets are already fretting about slowing economic growth in China and other major economies and the still unresolved U.S.-China trade dispute.
So while the Saudis are probably aware that they can’t afford to push oil prices to their budget breakeven, the goal, according to Reuters’ sources, is still above the current oil prices.
The last time Brent Crude traded at $70 or above was in early November last year, when prices were plummeting from the $80-plus levels from early October.
At that time, in the run-up to the return of the U.S. sanctions on Iran’s oil when Washington was promising zero Iranian exports, Saudi Arabia, its close Gulf Arab allies, and Russia had opened the taps to pump more oil to offset what was expected to be a severe loss of Iranian barrels.
But then the U.S. granted waivers to eight key Iranian customers, sending prices sharply downward, exacerbated by fears of a global economic growth slowdown.
With U.S. waivers due to expire in early May, Saudi Arabia and OPEC appear to be timing oil policy changes more carefully this time around, potentially to prevent high volatility and a miscalculation in supply.
Last week, a panel of the OPEC+ allies said it was recommending that partners cancel a scheduled extraordinary meeting in mid-April, leaving the decision for the cuts extension for a meeting at the end of June instead.
The panel’s motivation for scrapping the April meeting is “In consideration that market fundamentals are unlikely to materially change in the next two months.”
Market fundamentals may not materially change in two months, but the U.S. decision on Iranian waivers will be in before OPEC meets at the end of June to decide what to do next—roll over the cuts, extend the cuts with changed quotas, or scrap the reductions.
Saudi Arabia, which has received President Trump’s support when the world shunned Riyadh over the killing of Saudi government critic Jamal Khashoggi, could again find itself subject to Trump’s pressure to ‘take it easy’ and relax cuts, especially if oil prices were to reach $70 a barrel or higher.
However, the Saudis may not budge this time, according to a source in OPEC who spoke to Reuters.
“They (the Saudis) do care about Trump, but they can’t do whatever he says every time,” the OPEC source told Reuters last week.
The fiscal position and budget needs of Saudi Arabia’s oil-dependent economy could trump concerns over loss of market share or President Trump’s pressure to keep oil prices low.