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Which way will the Saudis shuffle the pack?

Tue 12 Sep 2017 by David Foxwell

Which way will the Saudis shuffle the pack?

Anyone with an interest in the oil price follows developments in Saudi Arabia closely. They should do so especially closely right now, because decisions could be taken soon which could affect the oil price and the oil industry.

Several OPEC countries, of which of course Saudi Arabia is the most important, have recently raised the prospect of production cuts being extended to beyond Q1 2018.

At OPEC’s meeting in Vienna at the end of November, there is also said to be a plan to discuss the inclusion of Libya and Nigeria in the new quota system and to talk about stricter requirements for Iran.

As Commerzbank Research noted, this talk – which admittedly is all that it is at the moment – is supporting oil prices in the short term, as are announcements of lower October oil exports by the United Arab Emirates and Saudi Arabia.

However, as Commerzbank highlighted on 12 September, prices are being supported not only by the lower exports and Saudi Arabia’s report that production fell further to below 10 million barrels per day in August, but also by the country’s political news, which is currently dominating the regional news backdrop.

“It seems that tensions between Qatar and Saudi Arabia rose to a new level following the failure of a reconciliation attempt by telephone last week,” Commerzbank’s research team said. “There is no end to the rumours about the possibility of an imminent power shift in favour of Crown Prince Mohammed bin Salman; and yesterday (11 September) an IS attack on the country’s Ministry of Defence was apparently thwarted. Tensions in and around the world’s largest oil exporter are also likely to ensure a certain geopolitical ‘premium’ on the oil price in the medium term.

So, will the Saudis force through an extension beyond early 2018? If they do, what might the result be? Perhaps buoying up oil prices might just help shale oil producers.

It is also argued that what the Saudis really ought to do is the opposite – never mind cutting production, as a low-cost producer, they should go all out to boost production, make the oil price fall further and put a halt to fracking.

Does that sound familiar? It’s pretty much the argument that has been doing the rounds since the oil price fell three years ago.

The difference between now and then is that – as an article by Jason Bordoff, director of the Center on Global Energy Policy at Columbia University in the Financial Times noted – the Saudi government is planning to slow the pace of its National Transformation Plan, a plan it only recently launched.

It is running a large fiscal deficit, and has seen a steep decline in reserves. The Saudis either need to do something that will boost the oil price, so they earn more per barrel, or they need to boost revenue from oil by opening the spigots and pumping more of it. Which way do you think they will flip?

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