Saudi Arabia Energy Minister Khalid al-Falih told the BBC recently that the more oil and gas-friendly Trump administration may encourage the Kingdom to increase its oil investments in the US. “President Trump has policies which are good for the oil industry and I think we have to acknowledge it,” he said.
What he said next was particularly notable, especially in light of Saudi’s leadership of OPEC over the last three years. “We have no problem with the growth of American indigenous oil supply. I have said it repeatedly as long as they grow in line with global energy demand, we welcome them.” Even given the “demand” caveat, it’s hard to imagine al-Falih’s words being uttered by his predecessor at the oil ministry, Ali Naimi. It was the latter who spearheaded OPEC’s market share defense strategy, first enforced at OPEC’s November 2014 meeting. It was as a result of this gathering that the then 12-member group refused to cut production in order to support prices. In the US oil patch, early 2015 saw the beginnings of massive layoffs, steep capex reductions, project delays and cancellations, and other painful moves.
“If other, less efficient producers don’t cut, why should we cut?” was the refrain tirelessly uttered by Ali Naimi throughout his tenure as oil minister, which ended last spring when Deputy Crown Prince Muhammad bin Salman replaced him with Aramco veteran al-Falih.
Al-Falih soon proved to be more amenable to his predecessor to Saudi’s participation in coordinated OPEC action to support oil prices. Through the summer and fall of last year, OPEC gradually steered closer to reaching an output freeze or cut agreement. Those discussions ultimately culminated in OPEC’s November 30 decision to cut production to 32.5 M/bpd- effectively reintroducing the quota system which it abandoned last year.
In addition to his positive comments about US oil producers, al-Falih also accepted Saudi archrival Iran’s demand that it be exempt from participating in a production cut. The latter’s return to the oil market in early 2016 after years of sanctions was initially met with diplomatic acrimony by Saudi, and was one of the main reasons for the cancellation of an oil production freeze deal in Doha last April. For context, it was amid that failed deal that Ali Naimi was replaced by al-Falih.
As we enter February, it seems that OPEC’s members are, so far, complying for the most part with the November production cut agreement- including Saudi. A recent Bloomberg report indicated that the group cut production by 840,000 bpd in January to bring output for the month to 32.3 M/bpd. The report said that the group on average implemented 83 percent of those reductions. Saudi Arabia alone cut output by 564,000 bpd in January. That’s 16 percent more than the 486,000 bpd reduction it vowed on November 30.
Saudi Arabia and its Gulf peers the UAE, Kuwait, and Qatar have contributed 82 percent of all the OPEC cuts, versus a planned share of 68 percent, according to a Reuters survey. But Venezuela and Algeria have delivered only 18 percent of their pledged cuts, while Iraq’s compliance was at 24 percent in January. Significantly, compliance excluding Saudi Arabia and Kuwait averaged only 50 percent for the month.
However, these cuts were offset by increases from Nigeria, Libya and Iran. Libya increased production to 690,000 bpd- the highest level in over two years. Nigeria boosted output by 9.3 percent to 1.64 M/bpd, and Iran pumped the most since 2010 at 3.8 M/bpd. If these exempt countries continue to increase production, and if US producers begin boosting output (which right now is likely given that for the 13th week in the last 14 weeks the rig count has increased), the impact of the production cuts will undoubtedly be mitigated.
Also, recall that major non-OPEC producers agreed to curb output by 558,000 bpd soon after OPEC reached its accord. Russian Energy Minister Alexander Novak said last week that the country cut production by 117,000 bpd in January. The country has pledged to cut production by as much as 300,000 bpd, comprising more than half of the total non-OPEC pledge.
As we recently explored, if the production increases offset the production cuts, more supply could be added to the global oil market, which could once again drive prices south. In that sense, there is a risk (however slight it may be at present) 2017 could turn into 2014.
Returning to al-Falih’s words regarding the US oil patch, it is a positive sign that President Trump’s pro-oil agenda seems to be largely setting the tone for his “oil foreign policy.” The “America First” theme that pervades both his domestic and foreign policy seems to be prompting unexpected cooperative overtures from global oil officials. This is in marked contrast to the angry reaction by Saudi to Trump’s proposed oil import tax during the campaign last fall.
To a large degree, the 2017 oil story will unfold according to the interplay of Saudi Arabia and Donald Trump. Buckle your seatbelts.