Saudi Arabia has two options for oil production: Capital Economics

By  Trend

The upcoming OPEC meeting is likely to result in Saudi Arabia agreeing to reduce its oil output, the UK-based Capital Economics said.

"But we think that any cut will be at the more modest end of the spectrum as the authorities balance the need to placate President Trump with a desire to put a floor under oil prices and prevent acrimony within OPEC," said a report from the company.

Capital Economics believes that the next week’s OPEC ministerial meeting is increasingly clouded in uncertainty.

"If the Saudi authorities decide to keep oil output and exports at their current high levels, it might hint that the Saudis are reverting to the strategy that prevailed in 2014-16 of protecting market share. Oil prices would probably fall further, perhaps to $40 per barrel. This would deal a further blow to the Kingdom’s oil export revenues, causing the budget and current account positions to weaken. We doubt that major balance sheet strains would emerge," said the report.

Crucially, though, the company expects this approach would destroy Saudi’s credibility within OPEC. "The Kingdom has probably pushed hard to build support for an output cut and to back track now would make it more difficult to force through policy shifts in the future. "

"Accordingly, we think that there are two other options that Saudi policymakers will find more palatable. The first is to keep production high but restrict exports. It’s worth noting that, in recent comments regarding the possibility of oil output cuts, Saudi Oil Minister Khalid al-Falih focused on supply to the market (i.e. exports) rather than actual production," said the company.

The UK-based company suspects that any support to oil prices would prove fleeting, however, if the markets start to see that Saudi is building large stockpiles of oil.

"The second option is to push ahead with an outright production cut. Having ramped up output to 11 million barrels per day in recent months, the Saudis could opt to take production back to the levels of 10 million barrels per day that prevailed in 2017 and early 2018," said the report.

That would boost oil prices significantly, according to Capital Economics.

"We think it’s more likely that Saudi Arabia undertakes a modest output cut of 0.5-0.8 million barrels per day. After all, a reduction in output on this scale would only partly reverse the rise in production since the middle of the year. Moreover, it would probably be enough to soothe the rest of OPEC."

OPEC leaders will gather in Vienna on Dec. 6 to discuss how to manage the oil output, supply glut and demand slowdown.

For the first time ever, in 2016, the Member Countries of OPEC coordinated with 11 non-OPEC oil producing countries in a concerted effort to accelerate the stabilization of the global oil market through voluntary production adjustments, which amounted to approximately 1.8 million barrels per day.

The Declaration was an outcome of the Joint OPEC-Non-OPEC Producing Countries’ Ministerial Meeting held on 10 December 2016 and was effective for an initial period of six months. The Second Joint OPEC-Non-OPEC Producing Countries’ Ministerial Meeting, held on 25 May 2017, decided to extend the voluntary production adjustments for another nine months commencing 1 July 2017. At the third joint OPEC-Non-OPEC Producing Countries’ Ministerial Meeting, held on 30 November 2017, it was agreed to amend the Declaration of Cooperation so that it will take effect for the entirety of 2018.