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Saudis Could Face An Open Revolt At
Next OPEC Meeting
By Dalan
McEndree
Oil Price, Al-Jazeerah, CCUN, August 29, 2015
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OPEC next gathers December 4 in Vienna, just over a year since
Saudi Oil Minister Ali Al-Naimi announced at the previous OPEC winter
meeting the Saudi decision to let the oil market determine oil prices
rather than to continue Saudi Arabia's role of guarantor of $100+/bbl oil.
Despite the intense
financial and economic pain this decision has inflicted on Saudi
Arabia, its fellow OPEC members, and other oil producers, the Saudis have
given no indication they plan to alter course. In fact, Saudis have
downplayed the impact of lower prices on their country, asserting that the
kingdom has the financial wherewithal to withstand lower oil prices.
Presumably swayed by Saudi equanimity, financial markets do not see
the Saudis abandoning their current policy before, during, or after the
upcoming OPEC meeting. CME Brent oil futures project continuity: as of
August 18, 2015, CME Brent futures projected the price remaining below
$60/bbl until June 2017. A
CNBC poll of
oil traders, analysts, and major fund investors, aired on CNBC August 17,
showed 95 percent believing the Saudis will not alter course.
Are
the futures market, CNBC's oil traders, analysts, and major fund
investors, and others, being lulled into an unjustified consensus?
The damage the Saudi decision has inflicted on Saudi Arabia itself
provides reasons for the Saudis to change course.
Saudi
Policy: OPEC-centric or Self-Serving?
Stresses within
OPEC should add to the pressure on the Saudis to rethink their strategy.
The Saudis sold their change to their fellow OPEC members as being in
OPEC's general interest. They asserted that the their traditional method
of stabilizing the oil market, production cuts, would not work since
non-OPEC producers would increase output; second, that "market" forces
would reduce investment and therefore increase prices in the medium and
longer term and ultimately benefit all OPEC members; and third, that any
Saudi increase in output was aimed at defending its market share, not
reducing theirs.
As the first anniversary of the Saudi decision
approaches, it would be reasonable for OPEC outsiders–OPEC members, other
than the Saudis and their Gulf Arab allies, Kuwait, UAE, and Qatar—to
interpret Saudi policy shift as designed to serve Saudi interests and
those of its Gulf Arab allies rather than their interests and those of
OPEC in general.
"Market" forces include many components. A key
component—perhaps the key component—is a country's capability, at a
minimum, to maintain output, and better yet, to increase output. Financial
wherewithal is the foundation of this component. Saudi and Gulf Arab OPEC
members' foreign currency reserves and sovereign wealth funds (SWF)
comprise approximately 78 percent of total OPEC member holdings,
$2.73 trillion of $3.05 trillion.
As the following table
shows, their advantage is particularly large on a per capita basis. Of the
non-Saudi, non-Gulf Arab ally OPEC members, only Libyan per capita
resources exceed the average. (The UAE includes data for three SWF funds
only: Abu Dhabi Investment Authority ($773 billion), Abu Dhabi Investment
Council ($110 billion), and Investment Corporation of Dubai ($183
billion)).
Given the other budgetary demands on their oil revenues, $50/bbl or $60/bbl
oil leaves these OPEC outsiders with little to invest in maintaining oil
output, much less expanding output. Budgetary pressures and limited
financial resources, for example, have forced the Iraqi government to
request its foreign partners, BP in the Rumaila field and Exxon in the West
Gurna-1 field, to reduce spending to cut 2015 investment by $500 million
($1.1 billion vs. $1.6 billion) and $1 billion ($2.5 billion to $3.5)
respectively.
While all OPEC members, including Saudi Arabia, have
suffered from the Saudi decision, they have not shared the pain equally.
Saudi Arabia and its Gulf Arab allies, except Qatar, have increased output,
while the output of other OPEC members, other than Iraq and Angola, has
either flat-lined or decreased, compared to 2014:
Given Saudi determination to defend its export markets, it is
interesting that the percentage gain in their crude exports exceeded the
percentage gain in crude output in 1H 2015, by 2.7 percentage points. For
Iran, the only other OPEC country for which the IEA provides domestic demand
data, the increase in exports, 0.7 percent, matched the increased domestic
output.
Interestingly, also, the Saudis increased their share of OPEC average
daily output in the first half of 2015 over 2014 average daily volume—and
their share of average daily global output. Their share of OPEC output
increased to 26.6 percent in 1H 2015, from 26 percent on average in 2014,
while their share of world output increased to 10.4 percent from 10.2
percent.
For the OPEC outsiders, this should be particularly
distressing, since the increase in output likely deepened the decline in
prices the Saudi decision to abandon its role as guarantor precipitated.
Both results continue trends seen since 2010. Saudi share of OPEC output
increased three percentage points, from 23.6 percent in 2010 to 26.6 percent
in 1H 2015. At the same time, the Saudi share of world output increased 1.1
percentage points, from 9.3 percent to 10.4 percent, during the same period;
during the same period, OPEC output as a share of global output declined
slightly, from 39.5 percent to 39.2 percent.
In fact, over this period, Saudi Arabia and its Gulf Arab allies
increased their total output 18.1 percent while the output from the other
OPEC members decreased 5.4 percent. During this period, the Saudi and Gulf
Arab share of global output was flat, declining only 0.1 percentage point,
while the share of the other members declined 1.5 percentage points, from
16.7 percent to 15.2 percent.
Impact on Non-OPEC Producers as Advertised?
In defense of their policy, the Saudis could point to
IEA
projections that show the rate of growth in output from major non-OPEC
producers slowing substantially in 2016, particularly in North America, a
major Saudi target, and Brazil:
However, it is reasonable for the OPEC outsiders to question the actual
efficacy of Saudi policy on non-OPEC producers and the benefit it will bring
them. In both the United States and Russia, each of which produces roughly
as much as Saudi Arabia, output increased in 2015 rather than decreasing,
and will continue to increase in 2016 in the U.S.
The IEA projects
Brazil's output, despite Brazilian political turmoil, growing 6.45 percent
in 2016. Moreover, Saudi policy, combined with the impact of U.S. and EU
sanctions on Russia, led to the undesirable result for OPEC (and other oil
exporters) that Russian exports have increased, from 7.21 million
barrels/day in 2014 to 7.55 million barrels per day in 1H 2015, in part
because as Russia's economy contracted, reducing domestic crude demand to
3.47 MMbbls/day in 1H 2015 from 3.65 MMbbls/day, while crude output
increased to 11.025 MMbbls/day from 10.86 MMbbls/day.
Moreover, any
comfort the OPEC outsiders gain at best may be cold comfort. While the IEA
projects surplus production will begin to recede in 2H 2016, they are
suffering now (and in any case, it is a projection). As we have pointed out,
RBC Capital's
fragile five, Algeria, Libya, Nigeria, Iraq and Venezuela, the pain is
intense. Also, it is wealthy Saudi Arabia and its Gulf Arab allies and
non-OPEC members, in particular the U.S., Canada, Mexico (foreign
investment), and also Russia (Chinese investment), that will have the
financial wherewithal to grow output to satisfy the 18 million barrel
per day increase in demand that OPEC sees by 2040.
The
December 2015 OPEC Meeting
Given the Saudi decision's
positive impact on their and their Gulf Arab allies' relative position
within OPEC and its negative impact on OPEC outsiders, it is possible,
perhaps even likely, the Saudis will face an OPEC outsider revolt at the
December 4 OPEC meeting.
The Saudis and their Gulf Arab allies would
seem to have three possible approaches, should a revolt occur:
Reconciliation, as Saudi Arabia acquiesces in the wishes of OPEC's weaker
members to bring price increases forward through OPEC production cuts, Saudi
Arabia bearing the brunt;
Separation, as the Saudis and their Gulf
Arab allies ignore their fellow members' entreaties and force them to wait
for "market" forces to balance supply and demand; or
Divorce, as the
Saudis and their Gulf Arab allies decide to exploit their financial wealth
and go their own way, therefore forcing their fellow OPEC members, unable to
finance their domestic oil industries, unwillingly to bear the brunt of
global production cuts.
In October 2014, the Saudis began signaling
their intention to abandon their role as guarantor. It is unlikely however,
that whatever Saudi decision makers are now considering, they will show
their hand in advance of the December meeting, since this would reduce
pressure on the non-OPEC producers that the Saudis claim to be targeting,
before necessary.
Source:
http://oilprice.com/Energy/Crude-Oil/Saudis-Could-Face-An-Open-Revolt-At-Next-OPEC-Meeting.html
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