Is Saudi Arabia giving up on its oil wars?

There is a faint whiff of realism entering into Saudi Arabian government policy. They have started to curb public expenditure, they have flagged salary cuts for public employees (not just now but in 2 years), they are desperately trying to diversify their economy. Much of the change has been forced due to self-inflicted collateral damage to their various “oil wars” against shale oil, against Iranian oil and against Russian oil. They have tried to use low oil price as a weapon in their political and ideological battles. But Saudi Arabia has not yet developed the capabilities (and competence) among its indigenous work force to cope without the fat cushion of oil revenues. Without foreign competence and labour, Saudi would collapse and the only thing keeping the foreign competence and labour there is oil money.

It may be a faint hint of an increasing pragmatism that for the first time in 8 years the Saudis and OPEC have agreed to a modest cut in oil production.

It is not the end of the  oil wars but it may be the beginning of the end.

Reuters: 

OPEC agreed on Wednesday modest oil output cuts in the first such deal since 2008, with the group’s leader Saudi Arabia softening its stance on arch-rival Iran amid mounting pressure from low oil prices.

“OPEC made an exceptional decision today … After two and a half years, OPEC reached consensus to manage the market,” said Iranian Oil Minister Bijan Zanganeh, who had repeatedly clashed with Saudi Arabia during previous meetings.

He and other ministers said the Organization of the Petroleum Exporting Countries would reduce output to a range of 32.5-33.0 million barrels per day. OPEC estimates its current output at 33.24 million bpd.

“We have decided to decrease the production around 700,000 bpd,” Zanganeh said.

The move would effectively re-establish OPEC production ceilings abandoned a year ago.

However, how much each country will produce is to be decided at the next formal OPEC meeting in November, when an invitation to join cuts could also be extended to non-OPEC countries such as Russia.

Oil prices jumped more than 5 percent to trade above $48 per barrel as of 2015 GMT. Many traders said they were impressed OPEC had managed to reach a compromise after years of wrangling but others said they wanted to see the details.

“This is the first OPEC deal in eight years! The cartel proved that it still matters even in the age of shale! This is the end of the ‘production war’ and OPEC claims victory,” said Phil Flynn, senior energy analyst at Price Futures Group. 

Jeff Quigley, director of energy markets at Houston-based Stratas Advisors, said the market had yet to discover who would produce what: “I want to hear from the mouth of the Iranian oil minister that he’s not going to go back to pre-sanction levels. For the Saudis, it just goes against the conventional wisdom of what they’ve been saying.”.

Saudi Energy Minister Khalid al-Falih said on Tuesday that Iran, Nigeria and Libya would be allowed to produce “at maximum levels that make sense” as part of any output limits.

That represents a strategy shift for Riyadh, which had said it would reduce output to ease a global glut only if every other OPEC and non-OPEC producer followed suit. Iran has argued it should be exempt from such limits as its production recovers after the lifting of EU sanctions earlier this year.

…….. Saudi Arabia is by far the largest OPEC producer with output of more than 10.7 million bpd, on par with Russia and the United States. Together, the three largest global producers extract a third of the world’s oil.

Iran’s production has been stagnant at 3.6 million bpd in the past three months, close to pre-sanctions levels although Tehran says it wants to ramp up output to more than 4 million bpd when foreign investments in its fields kick in. … Saudi oil revenue has halved over the past two years, forcing Riyadh to liquidate billions of dollars of overseas assets every month to pay bills and cut domestic fuel and utility subsidies last year.

It may even be that the Iranians and the Saudis are actually talking to each other.

Opec Countries (image pinterest.com)

Opec Countries (image pinterest.com)


 

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