Global oil prices are continuing their upward trajectory amid concerns that more Iranian barrels will be removed from the market once U.S. sanctions hit the country’s energy sector Nov. 4. Oil market jitters are also being exacerbated by supply disruption problems in Venezuela, Nigeria and Libya—all OPEC members.
Additionally, geopolitical factors are putting upward pressure on oil prices since Saudi Arabia, the world’s largest oil exporter, and regional rival Iran, OPEC’s third largest producer, are on opposing sides in the ongoing civil war in Syria and fighting in Yemen.
As prices for both global oil benchmark Brent crude and U.S. Benchmark West Texas Intermediate (WTI) crude hit multi-year highs, President Trump has again pressed Saudi Arabia and OPEC for help. However, Trump’s insistence that a Saudi-led OPEC reign in oil prices by increasing output is short-sighted.
Saudi Arabia may simply be unable to ramp up production in order to help fill any upcoming oil supply gaps. It has never produced more than 10.7 million barrels per day (MMbpd), while its claim to have at least 1.5 MMbpd of spare capacity remains uncertain.
Lack of spare oil production capacity is likely the reason Saudi Crown Prince Mohammed bin Salman met with Kuwait’s Emir Sheikh Sabah Al-Ahmed Al-Sabah recently to discuss joint oil production in the so-called Neutral Zone between the two countries. Oil fields in the overlapping area have a significant amount of combined capacity per day. However, political differences between the two sides remain an obstacle over the possibility of resuming long-idled production in the area’s fields.
Moreover, doubt over Saudi Arabia’s ability to help OPEC fill a looming supply shortage marks the kingdom’s descent from global oil markets swing producer to one that now plays a contributing role. The kingdom lost its ability to sway oil markets due to its ill-fated market strategy implemented in December 2014. It opted to forgo years of market wisdom and actually ramp up production amid an oil supply overhang in order to both protect its market share, particularly in key Asian markets, as well as drive U.S. shale oil producers (which had much higher break-even production price points) out of business.
However, the strategy backfired and almost drove Saudi Arabia to economic collapse. While some U.S. producers were indeed forced into bankruptcy, others simply found ways to lower production costs and continued to pump oil, exacerbating the supply overhang with a continued downward trajectory in oil prices that bottomed out just below $30 per barrel in January 2016.
Saudi Arabia eventually threw in the towel on its pump-at-all-costs strategy by the end of 2016 and was forced to turn to Russia and other non-OPEC producers for help, creating the so-called OPEC+ group of producers. By late 2017, the ongoing supply overhang came to an end as OECD oil inventory levels were reduced to five-year averages with a new floor established for global oil prices. However, it was only a partial win for Saudi Arabia since it had to rely on other producers to restore oil market equilibrium.
Going forward, OPEC+ with Saudi-Russian oil production cooperation as its main driver, will retain its hold on global oil supply and continue to reshape the world order for oil. Saudi-Russian cooperation also has geopolitical ramifications, while also complicating ongoing U.S.-Saudi bilateral relations. Increased energy partnership between Riyadh and Moscow will allow Russia to play a larger role in Middle Eastern affairs as Washington’s influence in the region diminishes. Riyadh may also be counting on Moscow to help deal with Iran over several issues, including the country’s regional hegemony and nuclear development ambitions.