Vienna meeting of Opec given extra bite as Gulf State bids to support barrel price amid growing deficit worries at home
The Vienna meetings of the Opec oil cartel can be uncompromising affairs. At the end of the two-day gatherings at the secretariat’s Helferstorferstrasse headquarters comes a ritual alarmingly known as the “gang-bang”.
When the doors are flung open at the end, hordes of analysts, consultants and journalists flood the room in a pell-mell dash to extract intelligence from the oil ministers.
The scrum is always thickest around the table of the Saudis – the de facto leader of the cartel – when desperate attendees have been known to throw each other out of the way to get a word. One 15-year veteran says it gets so rough that some women in the industry refuse to go when pregnant.
But this week’s meeting of the cartel has added bite as it opens on the day the Saudis set the final price for the float of their vast Aramco state oil company on the Tadawul stock exchange.
International investors have already balked at the steep $2 trillion (1.6 trillion) valuation originally demanded by Crown Prince Mohammed bin Salman (MBS). The snub has seen the IPO scaled back in ambition to the sale of a 1.5pc sliver, denying investment banks a bumper payday and effectively turning the exercise into a Gulf affair: a shakedown of wealthy Saudi families pressured to buy shares and help the desert state raise $25bn.
But industry watchers warn the float could come under immediate pressure from the dynamics of an oversupplied oil market. Exactly a year ago Opec – which accounts for just over 30pc of global production – agreed to output cuts of 1.2 million barrels of oil a day, in tandem with allies including Russia.
But fissures in the so-called “Opec+” coalition have been widening and the Saudis have been compensating for the non-compliance of other members by massively underproducing their own quotas, by more than 400,000 barrels a day in Opec’s latest figures.
The dilemma for Riyadh and its new oil minister, MBS’s half brother Prince Abdulaziz bin Salman Al Saud, is clear. Rival producers from outside the cartel are set to pump more oil into the market next year, but if the Saudis cut production too much to support the price, Opec will lose market share.
Meanwhile the public finances of the Saudis are creaking. The price of oil in the Opec “basket” of 14 members is currently $63 a barrel, but ratings agency Fitch reckons the Saudis need a price of $82 to balance the books over the next three years.
Fitch cut its rating on Saudi Arabia’s sovereign debt two months ago after the attacks on Aramco’s refineries, but it also flagged up the nation’s growing deficit due to the low oil price outlook, threatening the aim of a balanced budget by 2023.
The verdict underlined the urgency of MbS’s Vision 2030 plans to diversify away from oil and loosen the Kingdom’s dependence on the oil price to fund state spending and stave off social disorder. The Aramco float and the money it raises is a key plank of the strategy.
But the desperation for cash comes alongside a supply glut due to hit global oil markets next year. The International Energy Agency’s latest forecasts say non-Opec countries will pump an extra 500,000 barrels into the market in 2020 – 2.3 million barrels in total – thanks to “significant” growth from Brazil, Norway and a new producer, Guyana. US shale production will slow, but still add to buoyant global supplies, while existing stockpiles are high.
Commerzbank oil analyst Carsten Fritsch says: “The Saudis are between a rock and a hard place. They have no other choice than cutting production further to prevent another price drop, which they cannot afford given the Aramco float.”
Morgan Stanley estimates the cartel could have to cut another 700,000 barrels at least to put a floor under a flagging price.
Although the Saudis pump over a third of Opec’s oil, another headache for its rulers is the weak compliance with the current cuts regime from members such as Iraq and Nigeria; that’s even though US sanctions have taken Iranian supplies out of export markets while political turmoil has knocked the output of smaller producers such as Angola and Algeria.
Russia – another oil-dependent economy and big producer – has also signalled its resistance to further pruning production.
John Hall, chairman of consultant Alfa Energy, also reckons the Saudis will eventually be forced to cut output. He said. “They’re getting limited [on options] now. The only reason they have got compliance is that enough Opec members can’t produce what they’re supposed to produce anyway.”
“The only way they can balance it is to cut themselves – as Russia won’t cut any more – so they have to keep the price up, which means they get lower revenue because they’re not selling so much.”
Despite the concerns over a looming oil glut, there has been some relief for the Saudis in the 10pc-plus rise in global crude prices since early October. The perking-up of the price has been driven by hopes of a trade rapprochement between the US and China after Donald Trump said the two countries had struck a “phase one” deal and postponed tariff increases.
Fingers will be crossed in Riyadh that they can deliver to underpin the rise in prices and support Chinese oil demand next year, but the latest signs are not propitious.
Despite talk from Mr Trump that a deal was “very close”, white smoke is yet to emerge and reports suggest the talks could slide into the new year amid increased pressure from China on the US to roll back hundreds of billions in tariffs.
Trump himself added to the tensions by signing into law a bill supporting Hong Kong democracy protesters, immediately criticised by Beijing as “going down the wrong path”.
If a trade deal does not emerge before Dec 15, Trump will have to decide whether to slap a latest round of 15pc tariffs on another $160bn of Chinese imports. That would be a further turning of the screw on China, which is already hurting from the trade war, with its economy’s growth rate to slow below 6pc.
The IEA thinks global oil demand could rise by 400,000 barrels a day if tariffs are removed, although Mr Fritsch says the recent bounce in the crude price is “more psychological in nature” on hopes of a trade breakthrough.
He “doesn’t buy” the IEAs optimism over demand in a weakening global economy and predicts the risk of a “sharp drop” in crude if Opec fails to cut.
Most analysts expect Opec to tread a middle path, pushing for more comprehensive compliance with the existing regime while keeping deeper cuts on the table for next June, in case the economic and trade clouds darken.
Caroline Bain, commodities analyst at Capital Economics, says the Saudis are “in a bit of a bind” and added: “I think they would be reluctant to push for deeper cuts because they will just have to shoulder the burden of them and they will be concerned about loss of market share.
“By propping up the oil price it might serve them fiscally and the Aramco valuation but at the same time they are simply offering an incentive to the US [shale] producers to produce more.”
Ironically, over the longer term Ms Bain expects Gulf producers – and Aramco – to do well even as the accelerating pace of electrification dents oil. The shift could trigger a “renaissance” by bringing the region’s much lower costs to the fore. Aramco’s cost of production was less than $3 a barrel last year.
“In a world where demand for oil is falling, Opec producers will once again take market share,” she adds.
In the short term the going could be a lot tougher, with a tough debut for Aramco as rival suppliers fuel a glut which leaves the Opec cartel “hanging on” for influence, according to Hall. “They are sticking together because they need the camaraderie.”