Saudis Boxed In by Low Oil Prices
DOW JONES & COMPANY, INC. 10:22 AM ET 6/22/2017
Saudi Arabia is searching for ways to shake crude-oil prices out of a slump that threatens its new crown prince's economic-transformation plan, Persian Gulf oil officials say, but the kingdom has few good options.
Mohammed bin Salman, elevated to crown prince of Saudi Arabia this week, needs oil prices to rise from current levels of $45 a barrel to carry out plans to kick-start the kingdom's economy, largely through a partial public listing of its state oil company, known as Saudi Aramco. The Saudis are targeting $60 a barrel to help the initial public offering generate tens of billions of dollars, which would be plowed into developing new technology and industrial sectors in Saudi Arabia.
Members of the Organization of the Petroleum Exporting Countries have held informal talks in recent days about how to halt a nearly monthlong skid in oil prices, which have fallen more than 16% since late May. OPEC, along with big producers like Russia that aren't members of the 14-nation cartel, is already withholding almost 2% of the world's oil supply, but some OPEC members say more needs to be done to bring production in line with demand.
Prince Mohammed is known for taking aggressive action on several fronts, prosecuting a war in Yemen, leading the diplomatic freeze against Qatar, and greenlighting Saudi participation in OPEC's production cuts.
But the Saudis have less leverage over other OPEC members because of the Aramco IPO, said Jim Krane, a fellow who studies Middle East energy and geopolitical issues at Rice University's Baker Institute. Other OPEC members are unlikely to slash production further unless they see Saudi Arabia taking on a large share of the burden, because any new cuts would be seen as a push to support the Aramco IPO.
"It's almost kind of put them on the back foot," Mr. Krane said of the Saudi oil strategy.
It is a particularly difficult time for Saudi Arabia to attempt a bigger production cut. The kingdom still burns crude oil to produce electricity and it needs even more crude in the summer, when air conditioning use soars.
And some OPEC delegates say bold action could be counterproductive.
U.S. oil producers took advantage of a price spike late last year after OPEC announced its cuts, and ramped up production. The resulting flood of new crude oil has convinced some investors that OPEC's actions aren't enough to rebalance the market.
"There are doubts if this whole cut initiative was effective," said an OPEC national delegate close to the Saudis.
Another OPEC delegate said Prince Mohammed was likely to be less involved in Saudi oil policy now that he has expanded responsibilities as crown prince, acting as the country's day-to-day leader. As deputy crown prince, he was often involved in the kingdom's oil strategy, especially before he appointed his own choice, Khalid al-Falih, in 2016 to replace veteran Saudi oil minister Ali al-Naimi.
"It is a totally different approach from that seen during the last days of Naimi," the delegate said.
Saudi Arabia has time to wait for oil prices to rise, with the IPO not scheduled until 2018. Publicly, Saudi Arabia, its allies and OPEC are preaching patience.
On Thursday, OPEC issued a news release touting its members compliance with their pledges to cut production. "The oil market is moving in the right direction," the news release said.
Mr. Falih told an Arabic newspaper in London that Libyan and Nigerian production wouldn't stop OPEC's efforts to drain down the global oil oversupply by the end of 2017. The United Arab Emirates' oil minister, Suhail bin Mohammed al- Mazrouei, said OPEC wasn't planning any new action soon.
Privately, OPEC members' worries are centered on two members who were exempted from the obligation to cut output: Libya and Nigeria. Both had their oil industries disrupted by civil strife, but their production has come roaring back in recent months.
OPEC members say no consensus has emerged about Nigeria and Libya, which would both likely object to limits.
"Curbing production has always been a difficult task in OPEC," Bijan Zanganeh, Iran's veteran oil minister, told state media this week, confirming the OPEC talks.
In lieu of new cuts, Saudi Arabia has pursued other courses to help prices. Mr. Falih has highlighted the kingdom's reduced exports to the U.S., where the summer driving season usually sends demand higher. The kingdom has also cut exports to Asia.
Write to Summer Said at summer.said@wsj.com and Michael Amon at michael.amon@wsj.com
(END) Dow Jones Newswires
06-22-171022ET
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