- Falih says Saudi Arabia may cut below 10 million b/d
- Comments suggest kingdom will lead by example
- Saudi policy informed by previous experiences with
cuts
Saudi Arabia, the world's largest oil exporter, is making it clear
to the global market: the kingdom wants the output deal it
negotiated with major producing countries to stick, even if it has
to cut production more than it already committed to.
With the market watching on its day off Saturday as OPEC hosted a
meeting in Vienna with a dozen non-OPEC producers to seal the output
cut agreement, Saudi energy minister Khalid al-Falih declared that
his country was prepared to slash production below 10 million b/d,
after having previously agreed to cut down to 10.058 million b/d.
That means that Saudi Arabia could go beyond the expected season
declines in production that many experts had expected the bulk of
its reduction under the deal OPEC announced November 30 to come
from.
"I can tell you with extreme certainty, absolute certainty that
effective January 1, we're going to cut and cut substantially to
below the level we have committed to on November 30," Falih said at
a press conference in Vienna.
And the declaration came fresh on the heels of state-owned Saudi
Aramco reportedly informing its customers on Friday that its January
export nominations would be lower to conform with the agreed cuts.
With these gestures, Saudi Arabia may be signaling to its partners
in the deal to do their part and not cheat on their quotas. It also
potentially signals, however, that Saudi Arabia may cover for any
cheating countries.
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"The Saudi comments are significant and in my view are a signal they
might truly go sub-10 million b/d," said Michael Cohen, head of
energy commodities analysis for Barclays.
Under the deal finalized in Vienna on Saturday, 11 non-OPEC
countries agreed to cut a combined 558,000 b/d from the market, on
top of the approximately 1.2 million b/d that OPEC members committed
to cutting at their November 30 meeting.
Saudi Arabia has been pumping above the psychologically symbolic
benchmark of 10 million b/d since early 2015, as the kingdom
launched a market share battle in the wake of OPEC's momentous
November 2014 decision not to cut output in the face of looming
global oversupply brought on in large part by US shale.
For the greater part of a year, as many of its fellow OPEC members
clamored for an end to the market share strategy, Saudi Arabia
insisted that any output reductions would have to be shared
equitably -- a stance that failed to get major buy-in until recent
months.
Geopolitical rival Iran, one of the last holdouts, finally agreed to
hold its output at 3.797 million b/d, a 90,000 b/d increase from
current levels -- a concession from Saudi Arabia, but also a win,
considering that Iran had insisted on regaining its pre-sanctions
production level of some 4 million b/d before accepting any deal.
With the negotiations completed to everybody's satisfaction, Saudi
Arabia is keen to see the pact succeed to gain some much-welcome
fiscal relief and also bolster its efforts to reform its economy, a
task made easier politically and financially when oil prices are not
lingering in a $40/b malaise.
"We all benefit together. As the tide rises, all boats will rise,"
Falih told reporters Saturday as he left the OPEC secretariat. "It
signifies there are elements of trust that have built up. We have to
reinforce it."
PAST IS PROLOGUE
Of course, for now, talk is cheap.
The deal is to be monitored by a five-country committee composed of
Algeria, Kuwait, Venezuela, Oman and Russia.
But the six-month output agreement does not come into force until
January, meaning that the first independent estimates of OPEC
production that the producer group is relying on to verify progress
towards compliance will not be available until early February.
The lack of enforcement mechanisms, along with the fact that much of
the so-called cuts in the deal consist of natural declines that
analysts have already factored into their forecasts for 2017, has
prompted skepticism among many market watchers.
"Certainly, the Saudis and other Gulf commitments to cut about
750,000 b/d are real," said Joe McMonigle, an analyst with Hedgeye.
"But more than half of the 1.8 million b/d cut is suspect, and I
expect we will start to see signs of wide-spread non-compliance
early next year. The Saudi comments that they may go below their
ceiling is designed to support the shaky non-OPEC part and other
real concerns."
The skeptics also include none other than Falih's long-serving
predecessor, Ali al-Naimi.
Naimi, now retired, recently said in Washington that a deal between
OPEC and key non-OPEC producers to cut output would be good for the
market, but "the unfortunate part is we tend to cheat."
And Saudi Arabia has been burned by making aggressive cuts before.
Naimi, in his recently released memoirs, recounted a fateful
decision by former Saudi oil minister Ahmed Zaki Yamani in the
mid-1980s to cut the kingdom's production to prop up prices, which
had slumped in the face of growing supply.
Instead, Saudi Arabia saw those new supply sources from Alaska's
North Slope, the North Sea and Mexico take the kingdom's market
share, and when it boost production to reclaim what it had lost,
prices collapsed further.
That experience heavily influenced Naimi's decision in November 2014
to eschew cuts, which Falih now appears to be reversing, now that
almost all major state producers have agreed to cooperate.
Circumstances in the oil market are different now, and the cut Saudi
Arabia has committed to is much less than the drastic reductions
Yamani undertook, even factoring in Falih's comments that Saudi
production could drop to below 10 million b/d.
Rather, the output deal appears aimed at stabilizing oil prices in a
$50-$60/b range -- high enough and stable enough to provide
producing countries a lift, while not going to high as to encourage
a flood of US shale oil back onto the market.
SENDING A SIGNAL
"Our objective as OPEC [and] certainly my objective representing
Saudi Arabia is to provide stable energy supply to the global
economy and give long-term stability of supplies and reasonable
predictability of process," Falih said in Vienna.
It is a delicate gambit that Saudi Arabia, the rest of OPEC and the
11 non-OPEC producers in the deal have embarked on. The cuts could
backfire if US shale and other production not bound by the deal
prove to be much more resilient to bolstered prices.
Indeed, the US rig count jumped up 21 last week in the biggest
single-week rise since July 2015 likely due to the OPEC pact
announced November 30.
But the kingdom has signaled it is all in, betting that the market
is already on its way to rebalancing, and when it does, Saudi spare
capacity, which will be greater thanks to the cuts, will be
available to meet any future demand needs.
"The Saudis wanted to send a signal that it's going to be absolutely
crystal clear that [they will] cut," said Yasser Elguindi, an
analyst with Medley Global Advisers. "It reinforces that these guys
don't want prices below $50/b. There's no other conclusion than
things have changed in the kingdom."
--Herman Wang, herman.wang@spglobal.com
--Paul Hickin, paul.hickn@spglobal.com
--Rosemary Griffin,
rosemary.griffin@spglobal.com
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