Saudi Arabia faces decisive resolution regarding oil price battle

Saudi Arabia and its allies are not expected to make any major political decisions at the meeting of the Organisation of the Petroleum Exporting Countries (OPEC) this weekend. However, the Saudis face another challenge which is to appease President Donald Trump while keeping the Kingdom’s vision together of a major alliance between crude oil producers.

Trump wants the Saudis to boost production to prevent oil prices from rising, while his administration is re-imposing sanctions on Iran, OPEC’s third largest oil producer and Riyadh’s main regional rival. However, Saudi Arabia’s leadership of 24 oil-producing countries will be threatened if these states realise that the Kingdom is satisfying Washington’s wishes at their expense.

At the meeting in Algeria next Sunday, the Saudis hope to achieve their goal of making the alliance, formed two years ago to end the devastating oil price decline, more durable before the next big meeting in December. It is noted that OPEC, with its 15 member states, and a group of Russian-led oil producers have reduced their production voluntarily since 2017 to boost oil prices. Now, the Saudis and OPEC want to institutionalise the new alliance.

While working to appease Trump may raise questions about the Saudis’ leadership, the failure to send a clear signal to the US President may make OPEC his next target. This comes after the US Congress has reconsidered legislation aimed at preventing OPEC from manipulating oil prices. Analysts say that the Saudis are worried about Trump’s potential willingness to support such bipartisan legislation, which was rejected by Presidents George W Bush and Barack Obama.

Read: Trump sets implied oil price target below $80

Trump first blamed OPEC for rising oil prices in April. As such, production problems in some countries have pushed the oil producer’s alliance to cut output further than intended, helping to boost prices. However, analysts think that Trump’s policy towards Iran has played a key role in driving crude oil prices to their highest levels since 2014, in the range of $70 to $80 per barrel.

A news report said on Tuesday that Saudi Arabia is comfortable now with Brent crude prices, ranking above $80 a barrel, which prompted Trump to restart his criticism of OPEC in several tweets. The Saudis, it is said, are not comfortable with the fact that Brent crude is more than $80, because Trump will be upset about such a development.

Increasing production would harm many oil producers because few members of OPEC have significant production capacity. This means that many will witness a decline in their oil revenues, while a handful of other mega producers, such as Saudi Arabia, Russia and the United Arab Emirates, will expand their market share.

Analysts claim that the most probable course of action for OPEC this weekend is to reaffirm its current policy, seeking a slight increase in production, to return to its goal of cutting production by 1.8 million barrels per day. The Saudis and the Russians could then put downward pressure on oil prices, as both countries declared their readiness to face any supply shortfall.

According to energy hedge fund co-founder John Keldov, maintaining the status quo and failing to increase production will lead to higher oil prices. He expects the impact of Trump’s sanctions on Iran to be more pronounced in the weeks following the midterm elections. Once the elections are over, the US administration may be willing to bear a higher oil price.

Read: OPEC, Russia rebuff Trump’s call to boost oil output

Helima Croft, the head of global commodity strategy in RBC Capital Markets, believes that some market players do not understand how determined Trump is to penalise Iran. She says the question of how much Trump’s administration can control the Iranian oil market is only one part of the equation. In her view, the market does not focus enough on how Iran will react.

Iranian leaders have already threatened to disrupt oil shipments through the Strait of Hormuz, the world’s busiest sea route for crude oil exports. They can also resume their nuclear programme, warns Croft, or increase operations in foreign conflict zones, such as Yemen and Syria. This would inflame tensions in the region and increase geopolitical risks reflected in oil prices.

Saudi Arabia says it has nearly 2 million barrels per day of spare production capacity to be exploited. However, analysts say that it is unlikely that the Kingdom will manage to bring this production to market quickly enough, and it will have difficulties in maintaining that level of production. One respected commentator also questioned OPEC’s ability to calm the tensions in a market where Iran’s oil supplies are collapsing due to US sanctions, with spare capacity dwindling and production unsustainable for many member states.