Donald Trump continues to take credit for lowering oil prices.
Trump’s tweetstorm complicates the OPEC+ meeting in Vienna next week. Trump is very much leaning on Saudi Arabia, pressuring them not to cut output. And he has gone out of his way to protect the Saudis even though the CIA has concluded that crown prince Mohammed bin Salman likely ordered the murder of journalist Jamal Khashoggi. He clearly expects the Saudis to return the favor by not cutting production.
This puts Riyadh in a bind. Saudi Arabia needs to patch up its relationship with the West, but it also can ill-afford oil prices at current levels. Saudi Arabia needs Brent to trade north of $80 per barrel for its budget to breakeven. Massive budget deficits during the 2014-2016 downturn help explain Riyadh’s about-face in late 2016 – they had tried to force high-cost drillers out of the market by crashing oil prices, but ultimately caved and engineered an OPEC+ production cut to push prices back up.
Little has changed since then. Saudi Arabia’s spending commitments are still large, and that is before we even take into account MbS’ overly-hyped economic reform proposals. Saudi Aramco is also trying to figure out how to transform itself for the long haul. There was the much-ballyhooed Aramco IPO that has since been shelved. There were the plans for Aramco to issue one of the largest corporate bond offerings ever in order to finance a major stake in Sabic, the state-owned Saudi chemical firm. That initiative was also recently abandoned. Now, Aramco’s CEO says the company will spend $500 billion to transform itself into a global refiner and chemical maker.
That is going to require a lot of money, which means that the Saudi government desperately needs a rebound in oil prices. But that goal could run afoul of the American president, who just bailed them out over the Khashoggi murder.
The murder of Jamal Khashoggi put a lot more in jeopardy than merely low oil prices. MbS, after several years of glowing press in the West, put his country’s strategic alliance with the U.S. at risk when he (according to the CIA) ordered the assassination of Khashoggi. Now, with only Trump vouching for MbS, amidst a push by the U.S. foreign policy establishment to throw the crown prince under the bus, the Saudis have little room to anger the White House. That potentially means giving up on the more aggressive oil option floated a few weeks ago – a cut in OPEC+ production on the order of 1.4 mb/d.
The Wall Street Journal reports that the latest plan hatched in Riyadh is a so-called “quiet cut” in Vienna, which consists of a re-dedication to the original OPEC+ production cuts, emphasizing a return to 100 percent compliance. Because Saudi Arabia is now massively overproducing, by about 1 million barrels per day (mb/d), a return to the prior production target would translate into a sizable 1 mb/d cut.
“It will be still a big cut but less pronounced,” a senior Saudi oil adviser told the WSJ. The report suggested that this plan was “gaining traction among OPEC officials this week.”
The “quiet cut” would be an attempt to thread the needle. It would be small enough that it might keep Trump happy. It would also be small enough that Russia could sign on. Moscow has been more reluctant than the Saudis to slash output. But it would be large enough for Saudi Arabia – and large enough, in theory, to arrest the meltdown in prices.
“It is quite a political move. The last thing Saudi Arabia wants to do at the moment is to risk upsetting Trump,” the senior Saudi oil adviser told the WSJ.
The sudden sensitivity about how its actions are perceived by Washington demonstrates the far-reaching fallout of the Jamal Khashoggi murder. MbS has sacrificed a ton of leverage at the OPEC+ meeting, and more importantly, he has essentially given up full control over Saudi oil policy, for little gain.
“Because of Khashoggi, the Saudis will do anything to make sure Trump doesn’t do anything nasty” to them, an OPEC official told the WSJ.
By Nick Cunningham of Oilprice.com
