First, they said it nicely: play along and cut to your quotas, or we’ll all suffer low oil prices for longer. Then they put their foot down: start cutting deeper or else. And now it has emerged what the “or else” part was—a new price war.
The Wall Street Journal’s Benoit Faucon and Summer Said reported earlier this week that Saudi Energy Minister Abdulaziz bin Saud had threatened Nigeria, Angola, and Iraq with another oil price war if they didn’t get in line with the production cuts, according to OPEC delegates. If they kept producing more than their quotas, Saudi Arabia would start selling its crude at a discount on these three countries’ key markets, stealing market share. In a phrase reminiscent of some of the best crime dramas, bin Saud reportedly told Angolan and Nigerian delegates, “We know who your customers are.”
OPEC’s crude oil production last month fell to the lowest in thirty years, at 22.69 million bpd. However, Iraq, Angola, and Nigeria still fell short of their quotas: Iraq only managed to achieve 70 percent compliance, Nigeria did a little better at 77 percent, and Angola even better at 83 percent. But that was not good enough.
It is understandable why the OPEC leader has had enough. The Saudis were not only the driver behind the latest agreement. They also voluntarily deepened their own production quota, pledging to cut an additional one million bpd on top of the more than two million bpd they agreed to cut, shouldering the largest part of the total 9.7-million-bpd OEPC+ cut.
And they have stuck to it, unlike the three laggards. Last month, the Kingdom pumped 7.53 million bpd, when it had originally been set a quota of 8.5 million bpd, the same as OPEC+ fellow Russia, which, however, has been slow to reach its own quota. The Saudis have literally done whatever it takes to prop up prices. And prices have remained weak. That would frustrate even the most patient of producers.
Brent crude traded at more than $51 a barrel in early March, a few days before Saudi Arabia declared its first price war of the year against Russia for its refusal to sign up for an extension of the previous round of cuts, agreed on last December. On March 9, the benchmark plummeted below $35 a barrel.
After a further plunge in April on the back of the coronavirus lockdowns, Brent has to date recovered to about $40. So, if Saudi Arabia makes good on its threat, this time Brent—and WTI—will be falling from a lower starting point. This is the only thing we can be sure of.
Of course, the threat of a price war remains hypothetical. Perhaps it would prove to be enough to get Iraq, Nigeria, and Angola to mend their ways and start cutting production like they mean it. It would be the safer choice because Saudi Arabia has more oil, and it can afford to sell it more cheaply than the three laggards, at least for a while. But what if they don’t?
Well, if they don’t, we’ll likely have a new price crash, and it could turn out to be worse than the first one as it would come amid a rising fear—and perhaps some evidence—of a second wave of Covid-19 infections in the world’s largest consumer. Meanwhile, demand has been slow to rebound.
There have been some good signs such as a pickup in gasoline production in the U.S. and a drawdown in floating oil storage. And yet, most analysts warn that people around the world would continue to be cautious in commuting and traveling, which will continue to affect oil demand.
If, in such an environment, Saudi Arabia decides to make good on its threat, oil will fall sharply. Just how low it would fall is anyone’s guess, but it is safe to say such a development would hardly benefit anyone, including Saudi Arabia. Certainly, it could beef up exports to undermine the market shares of Iraq, Nigeria, and Angola in China and India by cutting prices, but it wouldn’t be able to keep on doing it for a very long time. The Kingdom has a deficit to deal with.
It could do it for a short while, to make its point. And then Iraq, Nigeria, and Angola could continue under complying because there would be nothing else Saudi Arabia could do to stop them. And that’s not all. Earlier this week, Russia’s Energy Minister said there had been no discussions in OPEC+ to continue cutting deep after the end of July.
As per the agreement, the cuts would be relaxed from 9.7 million bpd to 7.7 million bpd after the July extension. But it’s still early July, and there is a problem with compliance. That Saudi Arabia could propose another extension is not out of the question because oil continues to be way too cheap for it. And then we will have another OPEC+ drama brewing and, should the Saudis’ patience expire, a second price war.