When earlier this month Saudi Arabia served “a wonderful surprise” to oil markets in the words of its energy minister, oil prices jumped up. After all, the Kingdom said it would cut an additional 1 million bpd from its oil output to keep prices higher. But then Iran started ramping up its production, eyeing a rebound in exports to more than 2 million bpd. Prices were quick to fall. What’s next for OPEC’s leader?
The outlook for oil demand remains pessimistic, according to the International Energy Agency. In that sense, Saudi Arabia’s decision to further cut production was the right thing to do. However, lower production means lower exports, and lower exports mean lower oil revenues.
The latest data, for November, shows that Saudi exports took a dive of more than 25 percent, to some $15.5 billion from $21.54 billion a year ago. But oil exports specifically did a lot worse, dropping by almost 40 percent on the year in November.
To be fair, the oil demand outlook has somewhat improved since November, what with all the vaccines against Covid-19 that are being rolled out. These lent support to prices and consequently to Saudi Arabia’s budget. The optimism, however, began to fade as it became clear the rollout will not happen as quickly as hoped. But just as benchmarks began to retreat, the wonderful surprise came from Riyadh to reverse the fall.
As is often the case whenever Saudi Arabia and OPEC cut production, there has been talk that U.S. shale producers might take advantage of this to boost their own output, undermining the cartel effort. For now, it seems U.S. shale drillers are too cautious to start boosting production at pre-pandemic rates. Prices are higher, but nobody knows how long they will remain higher. So, shale drillers are hedging their future production at current prices rather than rushing to add rigs.
And yet this may change and before too long. Earlier this month, the head of the IEA, Fatih Birol, remarked that a lot of shale oil is profitable at current prices. Cautiousness may be in order, but shale drillers have debts to pay down, which might force some to boost production as it did after the last price crisis.Related: Egypt Looks To Resume LNG Exports As Prices Rise
Meanwhile, one of the world’s largest importers of oil is complaining about the “whatever it takes” approach employed by OPEC. India does not want higher oil prices, not when it imports more than 80 percent of the oil it consumes. A lot of it comes from Iraq, but Saudi Arabia is the country’s second-largest supplier of crude, which makes it a key market. And yet, the Kingdom recently lifted its official selling prices for this key market and others in Asia.
The “whatever it takes” approach has worked well in the past, up to a point. After that point, it starts working against its originator. Saudi Arabia is tackling a deepening deficit, an international green transition drive that seeks to make its main export commodity obsolete, and it faces a potential full return of its archenemy Iran on the international oil scene. There aren’t many options.
Economic diversification is still on the table, of course. The Vision 2030 plan of Crown Prince Mohammed is still active, with the latest update on it regarding the futuristic NEOM project, worth $500 billion, that will feature a smart city that is emissions-free. The price tag of the city: $100-200 billion. Meanwhile, however, Saudi Arabia commissioned zero solar projects last year.
Plans were to commission over 1 GW in new capacity as the Kingdom works to hit its own ambitious renewable energy targets. Yet none was actually built because Riyadh tried to renegotiate the price tag of the project with its developer, leaning on dropping solar tariffs in the region, PV Magazine’s Max Hall reported earlier this month.