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Cyril Widdershoven
Business dialogue, oil agreement concept: National flags with Oil pump and oil refining factory at night with fog and backlight. Energy industrial concept.

Analysts are still reeling from the cliffhanger statements made by Saudi Energy Minister Prince Abdulaziz bin Salman Al Saud, not only positively shocking the market by a unilateral Saudi export cut, but also reiterating the position that the Kingdom has been holding for decades, it is again pushing for the leading swing producer position in the market. Statements however that this is strong position the Kingdom holds, and that it is its historical or strategic right, should however be taken with a grain of salt.

The main message the market should now get in their mind is that OPEC+ is weakened, not by failure but by its own success. After struggling to get regain market stability, fighting historical levels of crude oil and petroleum products storage volumes, while facing an oil market glut in time of the COVID-19 crisis, some green leaves are showing themselves on the branches of OPEC+ and other producing trees.

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Optimism is in the market, even unexpectedly high, as shown by the enormous influx of investors in the future markets, where oil and non-oil commodities are showing almost all green figures the last months. The news of COVID-19 vaccines, and the expected Biden Administration in a couple of days in Washington, seems to be ruling markets. Crude oil demand and price settings seem to be heading to pre-COVID levels, but rational indicators are still contrary.

Global markets are still extremely volatile, riding with a quantitative easing and government support programs, but heading for a rocky future when these support programs in the USA, EU and other places are ended. At the same time, increased lockdowns in Europe, and even now in Japan and China, don’t bode well for a major economic upturn very soon. OPEC+ decision making has been only partly taking these developments into account.

The growing split between OPEC leader Saudi Arabia and Russia is showing increasingly. Moscow’s push to increase oil production, by adjusting the existing production cut agreement to allow 500,000 bpd extra the coming month on the market, was met by a strong Riyadh answer, Putin’s wishes were met with Riyadh’s refusal.

A difficult internal discussion forced the parties to find a Salomon’s decision, in which some OPEC+ members could official state an export increase, and Saudi Arabia taking the brunt. First reactions were positive, but Riyadh’s oil gurus understood that OPEC+ already was overproducing, so more needed to be done. The Kingdom’s decision to cut its own exports by 1 million bpd, bringing its own exports to the lowest levels in years, was needed to keep the market stable. OPEC+’s overproduction still can not be taken by the market in full. The threat of additional volumes in the next weeks by Iraq, Libya and potentially Iran, could destabilize markets very soon.

The Kingdom is playing a tricky game, not only looking at oil markets but also linking its decision to geopolitical developments in the first couple of months of 2021. By removing 1 million bpd of Saudi crude on paper, Riyadh is keeping its bromance with Russia in place. Saudi Crown Mohammed bin Salman and his older brother are increasingly capable of playing geopolitical cards to their own advantage.

By keeping Putin’s link with MBS in place, Riyadh will be able to counter some of the expected outfall of the inauguration of the Biden Administration. At the same time, by being flexible to its own OPEC brothers, especially Abu Dhabi’s Crown Prince Mohammed bin Zayed and Iraq, flexibility is in place to strengthen its own position. Still, to take on again the financial brunt of being swing producer, Riyadh’s ministers not all will be smiling. The Kingdom is hit by lower oil prices and revenues, as the latter are needed to put in place the economic diversification plans of MBS. Without successes there, the Crown Prince’s strategy for 2021, including taking over the office of his father, will be under severe pressure.

It is to be expected that the current flexibility of the Kingdom should not be taken for granted. The one-time surprise is not a long-term strategy, as higher revenues and economic stability are needed very soon. To count on higher oil prices for 2021 is still wishful thinking if global economic drivers are hit or Riyadh’s current position will be changed.

Surprises are the game of MBS, even that he is maturing in geopolitics and power games scenarios, MBS’s main focus is the survival of Saudi Arabia. If necessary, based on Riyadh assessments or unilateral production increases of others, Saudi Arabia is also still willing and able to take no prisoners. A possible reversal of the export cut can be done as quick as the surprise of the Saudi Energy Minister.

If Saudi fears about Biden or regional power conflicts are waning, a more pro-active role inside of OPEC is going to be taken. Expect not a pro-OPEC position to be leading, but a pro-Saudi position.

For OPEC’s future Saudi strategies are leading, for Riyadh OPEC’s future is not decisive anymore. Internal dissent will not always in 2021 be solved by Saudi Arabia shouldering the costs. A production cut change by Riyadh will for sure lead to dramatic price changes if COVID-19 has not left the building. Cheating will not be tolerated anymore, even not by Russia and its cohorts.

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