Saudi energy minister Prince Abdulaziz bin Salman has claimed to be inspired by former Federal Reserve chairman Alan Greenspan, but the central banker he seems to channel most often is Mario Draghi.
In his effort to support oil markets, the minister appears to be following a strategy similar to the former president of the European Central Bank’s pledge to “do whatever it takes”. The problem for Prince Abdulaziz, after a lengthy Opec+ meeting in Vienna over the weekend, is that while the rest of the cartel may share its goal, it doesn’t really share its commitment.
The only cut in output after two days of talks will be borne solely by Saudi Arabia, which will take 1 million barrels a day — or about 10 percent of the kingdom’s current production — off the market next month. And it’s only for a month, albeit with the promise that it can be extended.
The other producers in the 23-member group, which collectively pump more than 40 percent of the world’s oil, will largely keep their production as is, with existing restrictions only being formalized and extended until 2024 – a lifetime in a volatile market.
Opec+ ministers formed a united front after the meeting, according to deputies under pressure from Prince Abdulaziz. The African countries such as Angola, Nigeria and Equatorial Guinea reluctantly accepted that their basic production would be reduced next year, but are probably just playing along. They struggle to meet Opec+ targets, even in the face of budget cuts.
Delegates and advisers made it clear after the event that the African countries have no plans to cut production as they try to rejuvenate their production after being badly hit in the Covid-19 crash.
That in itself shouldn’t make much of a difference to the price of oil. Traders long ago disregarded production targets for countries like Nigeria and Angola and instead focused on what they actually produce. But public displays of unity only go so far as everyone suspects they are fighting behind the scenes.
Now Saudi Arabia has backed itself to cutting production alone — something Prince Abdulaziz once vowed to avoid, indicating he didn’t want free-riders in the group.
To compound the kingdom’s troubles, two of Saudi Arabia’s strongest partners in Opec+ – Russia and the UAE – are barely rushing to join in further cuts.
Russia is widely seen as an all-out business given the stress and tensions caused by Western sanctions and other measures designed to limit its oil revenues (though not necessarily its exports).
The UAE was the biggest winner of the meeting, gaining approval for a long-sought higher output baseline and approval to increase production by 200,000 barrels per day from next year.
“The United Arab Emirates clearly had a good weekend,” said Helima Croft of RBC Capital Markets.
Saudi Arabia does much of the heavy lifting alone. Traders think Prince Abdulaziz has now created a situation where the same short sellers he warned to “watch out” before the meeting can test its resolve each month.
It will be difficult for him to add the 1 million barrels a day back to the market unless the price stabilizes north of $85 a barrel, compared to about $75 a barrel before the meeting.
The market reaction has been lukewarm so far, with Brent oil up only about 1.2 percent on Monday. It could, of course, slowly grind higher. But the psychology of the market seems unconcerned about the prospect of real physical tightness.
There have been warnings all year that the market will tighten significantly in the second half of 2023, but so far traders have largely ignored the bait. A higher oil price would increase fears of a recession, inflation or higher interest rates, all of which would depress demand.
Rory Johnston of consultancy Commodity Context said traders “remained skeptical about the producer group’s ability to manage this market”.
There will also be a US presidential election next year, suggesting that while the White House has barely responded to the latest Opec+ move, traders know the Biden administration will focus on keeping pump prices in check.
Many are wondering if it’s time for Opec+ to take a breather after three production cuts in eight months. Prince Abdulaziz yesterday spoke of Opec+’s actions in a “precautionary” manner and stressed the need for “transparency” in the market. The latest comment raised some eyebrows in the oil industry, well aware of the exclusion of several prominent Opec reporters from the event.
But what might be considered a “precautionary measure” may also appear to others as excessive tinkering. Even “whatever it takes” loses its power if overused.
david.sheppard@ft.com
