OPEC: The return of the Saudi put

Published at 11:45 9 Dec 2019 by . Last edited 12:53 9 Dec 2019.

Listen here to our Global Call recorded on Monday (9 December), in which we discuss the key takeaways from the recent OPEC meeting.

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Saudi Arabia came to Vienna last week with three clear objectives. Firstly, to try to restore OPEC’s credibility by making clear that more than lip service on compliance would be required to sustain the current co-operation agreement. Continuing cuts at any level in Q2 20 and beyond will be conditional on improved Q1 20 compliance by the ‘cheaters’, namely Iraq, Nigeria and the UAE.

Secondly, given the Saudi Aramco IPO, to eliminate any potential downside to oil prices in Q1 20, when most forecasters saw crude stocks building. The deeper cuts means that we now expect crude stocks to draw counter-seasonally by 0.4 mb/d in Q1 20 (we are not assuming 100% compliance from the ‘cheaters’, which would lead to a 1 mb/d draw). As such, Saudi Arabia will defend a price floor of $60 Brent, although it appears Riyadh will tolerate some upside too, as Saudi oil minister Abdulaziz later said that OPEC wants stocks to return to 2010–14 levels.

Finally, to begin to reclaim Saudi Arabia’s place as a trusted steward of the oil market. The Kingdom’s leadership is aware that in recent years its oil policy has been inconsistent, chaotic and lacking in credibility, so Prince Abdulaziz made a point of repeating words such as ‘credible’, ‘verifiable’, and ‘methodology’.

OPEC’s deeper cuts, and the return of the Saudi put option to support Brent prices above $60, will end up overtightening an already tight physical market however, keeping Brent and Dubai backwardated through 2020.

Given Saudi Arabia has plenty of domestic refinery works over February–April, its crude exports should hold around 7 mb/d. However, should there be improved compliance from Iraq, Basrah Heavy exports will fall, adding further woes to complex refiners struggling to find heavy crudes and keeping Brent-Dubai narrow through H1 20. In general, run cuts are now looking more likely.

Fig 1: OPEC production baselines and quotas, thousand b/d
Source: OPEC Secretariat, Energy Aspects

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