[ad_1]
Donald Trump continues to welcome the drop in oil prices.
So that oil prices are down (thank you President T). Add that, which looks like a big tax cut, to our other good economic news. Falling inflation (listen to Fed)!
– Donald J. Trump (@realDonaldTrump) November 25, 2018
Trump's tweetstorm complicates the OPEC + meeting in Vienna next week. Trump relies heavily on Saudi Arabia, forcing them not to reduce their production. And he did everything to protect the Saudis even though the CIA concluded that Crown Prince Mohammed bin Salman had probably ordered the killing of journalist Jamal Khashoggi. He is clearly waiting for the Saudis to return the favor by not reducing production.
This puts Riyadh in an impasse. Saudi Arabia needs to tighten its relations with the West, but it can not afford to pay oil prices at current levels. Saudi Arabia needs Brent to negotiate north of $ 80 a barrel for its budget to break even. Huge budget deficits in 2014-2016 explain Riyadh's downturn in late 2016 – the group had tried to force high cost drillers out of the market by driving down oil prices, but had finally yielded and organized a reduction in the production of OPEC + to bring down prices up. Related: How President Trump undermines US oil producers
Little has changed since then. Saudi Arabia's spending commitments remain substantial, even before taking into account MbS's over-publicized economic reform proposals. Saudi Aramco is also trying to find a way to transform itself in the long run. There was the Aramco IPO, which sparked a lot of interest, which has since been abandoned. Aramco planned to issue one of the largest corporate bond deals ever made to fund a major stake in Sabic, the state-owned Saudi chemicals company. This initiative has also recently been abandoned. The CEO of Aramco announced that the company would spend $ 500 billion to become a refiner and manufacturer of chemicals.
This will require a lot of money, which means that the Saudi government desperately needs a rebound in oil prices. But this goal could go against the US president, who just bailed out after the murder of Khashoggi.
The assassination of Jamal Khashoggi was much more dangerous than the low price of oil. MbS, after several years of glaring press in the West, has endangered his country's strategic alliance with the United States when (according to the CIA) ordered the assassination of Khashoggi. Now, with only Trump guaranteeing MbS, in the midst of a push by US foreign policy aimed at throwing the crown prince under the bus, the Saudis have little leeway to anger the White House. This means potentially giving up on the more aggressive oil option launched a few weeks ago, namely a reduction in OPEC production + of the order of 1.4 mb / d. Related: The biggest losers of the current decline in oil prices
The Wall Street Journal reports that the latest plan developed in Riyadh is a so-called "covert cut" in Vienna, which is to reallocate the initial OPEC + production cuts, emphasizing the return to a 100% compliance. With Saudi Arabia currently producing a massive overproduction of about 1 million barrels per day (Mb / d), a return to the previous production target would result in a significant reduction of 1 Mb / d.
"It will still be a big reduction but less pronounced," said a senior Saudi oil adviser at the WSJ. The report suggests that this plan "is gaining ground among OPEC leaders this week".
The "silent cut" would be an attempt to thread the needle. He would be small enough for Trump to be happy. It would also be small enough for Russia to sign. Moscow is more reluctant than the Saudis to reduce its production. But it would be big enough for Saudi Arabia – and big enough, in theory, to stop falling prices.
"It's a pretty political gesture. The last thing Saudi Arabia wants to do at the moment is to risk upset Trump, "said the main Saudi oil adviser at the WSJ.
The sudden awareness of how Washington perceives his actions testifies to the far-reaching impact of Jamal Khashoggi's murder. MbS sacrificed a ton of resources at the OPEC + meeting and, more importantly, it basically gave up all control of Saudi oil policy, for minimal gain.
"Because of Khashoggi, the Saudis will do everything for Trump to do nothing nasty to them," said an OPEC official at the WSJ.
By Nick Cunningham from Oilprice.com
More from Reading Oilprice.com:
[ad_2]
Source link
