PETER WEBER
OPEC+ energy ministers met in Vienna over the weekend, and most of the gathered nations agreed Sunday to maintain previously agreed-upon reduced oil output through the end of 2024. The United Arab Emirates won permission to boost oil production. But Saudi Arabia, OPEC's most important member, announced it will unilaterally cut production by 10%, or 1 million barrels a day, starting in July.
OPEC and its Russia-led allies almost always cut or raise output in tandem, using their official meetings to rubber-stamp production plans agreed to beforehand, but last weekend saw "one of the most contentious production meetings in recent years," The Wall Street Journal reported. Saudi Energy Minister Prince Abdulaziz bin Salman wanted across-the-board cuts to boost oil prices, but other members, especially in Africa, fiercely resisted.
Saudi Arabia's surprise decision to shoulder the entire million-barrel cut by itself did boost oil prices a bit, and it could lead to higher gas prices this summer. But because the Saudis will be selling less oil, a modest price hike will leave the kingdom with less revenue. What's behind Saudi Arabia's go-it-alone production cuts?
What are the commentators saying?
When the Saudis engineered OPEC+ production cuts in October and again in April, it was widely seen as a poke in the eye to President Biden, who had personally asked Saudi Crown Prince Mohammed bin Salman (MBS) to increase output amid stubbornly high inflation. But now it seems they maybe just need the money.
Oil revenue accounts for two-thirds of Saudi Arabia's income and global prices are still a fistful of dollars short of what Riyadh needs to even balance its budget, much less pay for "the giga-projects that lie at the heart of its Vision 2030 program to transform the economy," Eoin McSweeney wrote at CNN. The crown prince is trying to diversify the Saudi economy, but "foreign investment isn't anywhere near where Riyadh wants it to be," and there's a tremendous need for cash as MBS's grandiose Vision 2030 projects enter the construction phase.
Prince Abdulaziz, MBS's half-brother, has also recently been "fixated" on punishing "Wall Street short sellers," whose oil market "bets can cause prices to fall," the Journal reported. Some analysts see Abdulaziz's unilateral output cut driven in part by his "annoyance" at a perceived "mismatch between the underlying fundamentals of the market — which OPEC can influence — and trader sentiment, which is a tougher beast to corral," David Sheppard wrote at the Financial Times. The decision to keep July's cut open for extension, brokerage Jefferies suggested, was "likely put in place to discourage future short positioning."
What's next?
Abandoning OPEC's "all for one, one for all" playbook is a potentially "high-reward but extremely high-risk strategy" for the Saudis, and "for now, it doesn't look like the strategy is paying off," Javier Blas argued at Bloomberg Opinion. That could change if Abdulaziz's unilateral cut shocks a market "about to get tighter anyway thanks to seasonally rising oil demand" and prices jump "back to the $90 to $100 range the Saudis prefer." But the "far less rosy view" is that "the OPEC weekend didn't go Saudi Arabia's way, and Prince Abdulaziz was, effectively, forced into a solo cut," helping other members at Riyadh's expense.
As Abdulaziz knows well, Saudi Arabia tested this strategy of "desperately trying to limit its own supply to keep the market in balance" in the 1980s, David Fickling wrote at Bloomberg Opinion. It was great for slowing climate change but terrible for the Saudis: Riyadh's "Samson-like attempts to carry the entire global oil market on its shoulders ended in a shocking reversal" in the 1980s, with the Saudis slashing prices and pumping freely to an oil-thirsty world.
The world isn't quite as thirsty now, Fickling added, and "should the current run of restraint by Saudi Arabia end with another reversal," this "accelerating energy transition will present the kingdom with an alarming question. Perhaps this time when the Saudis open the taps, the world will no longer want what they're selling?"
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