Two days from today, OPEC’s leaders will meet in Vienna for its semi-annual meeting. The de facto leader of the 12-member group, Saudi Arabia, has a lot on its mind right now. While it goes without saying that the global oil market will be the theme of the discussions, geopolitics will inevitably weigh heavily as well.
Saudi Shifts Gaze From US To Its Own Backyard
Whereas the Saudi-centric narrative this year and late 2014 was the effort to curb US oil production in order to gain market share- an objective that’s arguably been partially achieved- we see this December’s meeting as also fueled by geopolitical undercurrents that are amplifying the antagonism between Saudi and some of its chief rivals- most notably, Iran and Russia. We argue that Saudi’s posture- its attitude, if you will- on Friday will be meaningfully impacted by both the oil market actions (and intentions) and geopolitical machinations of these players.
At the outset, we concur that it is highly likely that OPEC will maintain its current production ceiling of 30 M/bpd as it continues to defend its market share from rival producers. Why? There are signs of victory: US oil production is slowing and is projected to decline next year. Why else? Other competition: Russia’s output remains at post-Soviet record highs. Add to this that Saudi’s OPEC peers Iraq and Iran are both expected to boost output in coming months.
In short, it would be against Saudi’s self-interest to lead the group to cut its production- why would it deliberately produce less of the commodity from which the bulk of its funds are derived? And unlike some of its OPEC peers, Saudi can withstand lower oil prices for a longer period of time. This doesn’t mitigate the financial stress the Royal Kingdom is experiencing as a result of low prices (we’ve addressed that elsewhere). Domestic priorities are indeed being realigned, Saudi’s credit rating has been downgraded (as has that of some of its major banks), and the economy is being impacted. But in the short-term, Saudi needs to maintain and gain its oil clout- not only to fund its current domestic programs, but to finance its military ventures and to reassert its regional gravitas.
In this post, we shall seek to get into Saudi’s mind by examining key components of the geopolitical situation of OPEC’s key player and how these could impact its thinking in Vienna. We’ll start by briefly visiting two of the major conflicts besetting Saudi now, and then we’ll move on to the 11th hour developments prior to Friday’s OPEC meeting.
The Royal Family’s Dilemma
The rise of ISIS has put the ruling al-Saud regime in a dilemma. It is forced to choose between firming up its opposition to Iran- translated as support for anti-Assad forces in Syria, together with the US, Turkey, and Qatar- and national security- translated as the desire to keep its regional Sunni allies in power as a bulwark against Syria and Shia Iran.
Saudi’s choice not to grant formal refugee status to Syrian refugees is a further reflection of its attempt to maintain the balance between society and regime. While Bashar al-Asad is Shia, Syria is mostly Sunni. And ISIS, birthed in Syria, is a radical Sunni sect. Saudi is concerned that formally accepting scores of Sunni refugees from Syria will render them susceptible to radicalization by radical Wahabi clerics (Sunni), many of whose utterances are similar to those of ISIS members. This could seriously imperil domestic stability.
And then add Russia to this mix. Geopolitically, Russia’s incursion into Syria in September in support of Assad and the warming of relations between Russia and Iran as a result of this move, further isolated Saudi in the region.
With US oil production slowing and Russian production hitting record highs, it can arguably be said that Russia is emerging as Saudi’s chief market share rival. And with Iran and Iraq standing with Russia and opposite Saudi in Syria, and with both countries planning to ramp up oil output soon, Saudi’s mind will likely be pondering strategies of how to strengthen its own geopolitical position and weaken theirs.
A Geopolitical Headache: Yemen
Saudi Arabia’s military involvement in Yemen began in March, six months before Russia’s intervention in Syria. Last year, the Houthis, a Shiite sect from Saada Province, allegedly supported by Iran, took control of the capital, Sana. In January, the rebels forced the resignation President Abdu Rabbu Mansour Hadi, the successor of Ali Abdullah Saleh.
In March, a coalition led by Saudi Arabia (and supported by the US), started a month-long military campaign against the Houthis and in support of President Hadi. Hadi fled to the port city of Aden in February and then escaped to Saudi Arabia.
The airstrikes have been relentless since March. According to the UN, more than 5,700 people, have been killed in the eight months of the campaign. Sana currently remains under the control of Houthi rebels, who over the last year have seized much of the north of the country. In the south, the government forces of Saudi-supported President Hadi remain in control for now, as they face pressure from Al-Qaeda affiliate AQAP as well as ISIS.
Yemen is located on the Bab al-Mandab strait, a narrow waterway linking the Red Sea with the Gulf of Aden, through which an estimated 3.8 M/bd of crude oil and refined petroleum products passed in 2013 toward Europe, the US, and Asia- an increase from 2.9 M/bd in 2009. Closure of the Bab el-Mandeb could keep tankers from the Persian Gulf from reaching the Suez Canal or SUMED Pipeline, diverting them around the southern tip of Africa, adding to transit time and cost.
Saudi Encroaches On Russia’s Space In Europe
Russia and Saudi, the world’s top oil exporters, are engaged in a fight for dominance in Europe’s oil market. In recent months, Saudi Aramco and Russian oil companies have been significantly discounting their crude to Europe. Saudi has been targeting countries such as Poland and Sweden, challenging Russia’s long-time dominance in the region.
In November, Saudi began supplying Sweden’s largest refining company, Preem AB, for the first time in about two decades. Though the firm is owned by a Saudi businessman, it has long been a buyer of Russian crude.
Saudi also began oil sales to Poland’s refiners Grupa Lotos SA and PKN Orlen SA. These were rare shipments of Saudi oil into Eastern Europe, where Russia has long held sway in the oil business. The Saudis are also considering storing oil in Gdansk, an oil terminal located in Poland’s Baltic Sea. This would enable the Kingdom to supply Eastern European customers more easily, a Saudi industry official told The Wall Street Journal in an interview.
Saudi’s move into the region has forced Russia’s oil firms to sell the country’s main oil export blend, Urals, for much less than average. While Urals ordinarily sells for less than Brent, that discount nearly tripled in October due to the wide availability of oil from the Middle East, OPEC said in its November report.
Rosneft CEO Igor Sechin said that Saudi Arabia was “actively dumping” its oil in Europe. He added that he would take actions to secure Russia’s markets.
11th Hour Developments: Maduro Continues Whistling Into The Wind
Ahead of Friday’s meeting, several OPEC players that have less of a cushion than the group’s Gulf states are urging OPEC to curb production in order to support prices. We’ve been here before. As was the case before the November 2014 and June 2015 meetings, Venezuela’s Nicolas Maduro is among the loudest OPEC voices urging for the group to take action.
Maduro said Tuesday that Venezuela was advocating a 5% output cut in order to support prices. Toward the conclusion of a 4-hour television show, he said, “Our [oil] minister Eulogio del Pino will put forth a very clear proposal to respect production ceilings…and examine a 5 percent cut in production.”
“The hour has come to put the oil market in order,” he added.
The oil price plunge of the last 18 months has hit Venezuela particularly hard, as the country derives 96% of its foreign revenue from oil exports.
Maduro isn’t alone, however. Earlier this month, Iranian Oil Minister Bijan Namdar Zanganeh sent a letter to the group urging a cut in excess production as the group’s output remains near record levels. Algeria and Nigeria are the other OPEC members that have called for production cuts.