OPEC preview

OPEC faces a difficult task this week, as it aims to prop up the oil price without antagonising the US or putting too much strain on state finances by cutting production too much.

Oil barrels
Source: Bloomberg

Expectations

Current forecasts suggest a cut of 1.4 million barrels per day will result from the meeting. Anything less than this would likely cause another drop in prices. The meeting may not go with an explicit number, merely creating an agreement to restrict supply. Again, this is unlikely to be well-received by the oil market.

Saudi Arabia – walking a tightrope

Saudi Arabia faces a difficult balancing act. On the one hand, it must avoid letting the oil price fall too far and hurt its finances (and those of the others in the Organisation of the Petroleum Exporting Countries [OPEC], though that is less of a concern). On the other, it will seek to avoid cutting too far, too fast, since this might lead to a sharp bounce in the oil price, which would annoy the White House.

Saudi Arabia knows that it has outraged world opinion with its actions regarding Jamal Khashoggi, and that only the lack of outright condemnation from the US has saved them from serious consequences. US President Donald Trump’s decision to equivocate on the subject, while not conditional on keeping oil prices down, may waver if they cut output by a significant amount.

But then again, with a defence budget running at 10% of gross domestic product (GDP) - almost five times the global average and three times the US budget in GDP terms - and large state spending commitments, Saudi Arabia has to look at some cuts in order to restore balance to its finances.

The Financial Times reports that the Saudi energy minister has argued that cuts of at least a million barrels per day are needed.

Russia

Although not an OPEC member, Russia is Saudi’s other major partner in the oil market. Russia too is caught between wanting to boost prices and keeping its oil wells going at full production. President Vladimir Putin is aware that falling oil revenues put pressure on the Russian state, at a time of austerity for the economy. Recent attempts to raise the pension age have not gone down well, and the president faces falling opinion poll ratings. Russia is arguably happy with the current state of affairs, but may be persuaded of the benefits of cutting production in return for higher prices.

A smaller than expected cut, however, might have the opposite effect, sending prices lower and resulting in lower output for Russian wells. This would not go down well in Moscow.

The rest of OPEC

Saudi Arabia could look to persuade other members to cut production. Nigeria and Libya were left out of the last round of cuts, due to the fact that their output was still recovering after shocks arising from political troubles.

But both are keen to keep producing to boost state revenues, while others like Iraq and Iran are also rather cool on the idea of reducing output.

Saudi Arabia faces a tough task convincing the rest of the cartel to cut output, particularly if it does not set out its own production cuts.

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