Crude Economics
Saudi Arabia Is Abandoning OPEC

The ousting of the Saudi oil minister Ali al-Naimi over the weekend helped deputy crown prince Mohammed bin Salman consolidate his rapidly rising power of the country. Al-Naimi held his post for more than 20 years, but in recent months had seen his considerable influence over the petrostate’s oil strategies wane. Mohammed bin Salman reportedly overruled al-Naimi last month in Doha, preventing the oil minister from agreeing to a deal to freeze production that would’ve allowed Tehran to continue to ramp up its own output while capping Riyadh’s. The new Saudi oil minister, Khalid al-Falih, once served as the chairman of the country’s state-owned oil company Saudi Aramco, and is now tasked with overseeing the task of taking that firm public. In the meantime, the current head of Saudi Aramco is publicly asserting the company’s intention of fighting for market share, as the FT reports:

Saudi Aramco chief executive Amin Nasser emphasised the company’s willingness to compete with rivals, putting on notice oil producers from regional adversary Iran to US shale producers. “Whatever the call on Saudi Aramco, we will meet it,” he said during a rare media visit to the headquarters of the state oil company in Dhahran. “There will always be a need for additional production. Production will increase upward in 2016.” […]

Mohammed bin Salman, deputy crown prince, has hinted that the kingdom could easily accelerate output to more than 11m b/d as Iran, Riyadh’s regional rival, tries to attract customers after years of sanctions.

Given the complexities inherent to the power struggles within the Saudi royal family, anticipating what’s afoot here with Mohammed bin Salman’s course corrections is ultimately a fool’s errand. That said, it certainly looks like the Saudis have abandoned the role of being swing producer for the global oil market. Living with bargain oil prices is now preferable to cutting production and inducing a rebound. Today, it’s all about fighting for a share of the crowded and oversupplied market.

Esteemed oil historian Daniel Yergin was among the first to say that OPEC’s era was coming to an end about a month ago, and now his diagnosis is becoming conventional wisdom. Thus, very few eyebrows were raised around the office when Rosneft’s Igor Sechin added his voice to this chorus of skepticism. Reuters reports:

[Igor Sechin] – one of the closest allies of President Vladimir Putin – was the only Russian official to consistently oppose the deal with OPEC even after the Kremlin effectively endorsed the plan. Now that his gloomy predictions about talking to OPEC have come to pass, Sechin feels vindicated and wants to help Russia avoid similar embarrassment in future.

“At the moment a number of objective factors exclude the possibility for any cartels to dictate their will to the market. … As for OPEC, it has practically stopped existing as a united organization…The company (Rosneft) was skeptical from the very beginning about the possibility of reaching any sort of joint agreement with OPEC’s involvement in current conditions,” said Sechin, in comments over the weekend which were embargoed until Tuesday.

As we saw when the price of crude collapsed in a matter of months back in 2014, what appear to be hard truths in the oil market can change very quickly. But when OPEC’s most powerful and most productive member—and really the only one in the cartel capable of significantly affecting the market—is so open about its efforts to reform away from an oil-dependent economy and so insistent on its intention to protect its market share, it becomes harder and harder to see the cartel as anything but a loose conglomeration of mutually-distrustful petrostates—a toothless organization that, with the sudden spike in non-OPEC production (read: shale), is no longer capable of achieving much of anything.

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