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OPEC’s New Saudi Kingpin Faces Demand Woes That Beat Predecessor

Grant Smith

(Bloomberg) -- The OPEC+ alliance has a new helmsman, but he’s about to confront the same challenges that thwarted his predecessor.

Saudi Energy Minister Prince Abdulaziz bin Salman, appointed at the weekend by OPEC’s biggest member, said he plans no “radical” changes to the kingdom’s oil policy. But the cartel’s attempt to revive the market by cutting production is struggling against economic headwinds, which have so far held prices below the level most members need.

The 24-nation coalition of the Organization of Petroleum Exporting Countries and non-members such as Russia remains solid. The group has gone well beyond its targeted cut of 1.2 million barrels a day, helping to offset surging U.S. shale-oil output. Yet key members who meet in Abu Dhabi’s opulent Emirates Palace hotel on Thursday to discuss their pact, also have to grapple with fears of a recession amid an escalating U.S.-China trade war.

“The market is consumed by the idea that we’re going to have demand destruction,” said Helima Croft, chief commodities strategist at RBC Capital Markets.

It’s these fears that held Brent crude near $60 a barrel, a price that may have hastened the dismissal of the previous Saudi minister, Khalid Al-Falih.

Labors Lost

It’s a sign of the uphill battle facing the group known as OPEC+ that, even as Iran’s exports were slashed by U.S. sanctions and Venezuela’s output slumped amid an economic crisis, Saudi Arabia has had to cut three times deeper than initially planned just to keep prices supported at $60. The kingdom says it’s pumping about 9.6 million barrels a day, the least in five years.

“This is the tightest market we’ve had for years, if not decades,” said Amrita Sen, chief oil analyst at consultants Energy Aspects Ltd.

The group’s efforts are successfully draining global oil inventories, which have fallen by 100 million barrels within the last three months, Sen said. Any surplus is now confined to natural gas liquids, a niche range of products separate from crude oil.

However, those labors have been undermined. Faltering economic growth has caused a sharp slowdown in fuel consumption, which was the weakest in a decade during the first five months of the year at just 525,000 barrels a day, according to the International Energy Agency.

The agency is poised to trim its forecast again for annual demand-growth to about 1 million barrels a day, Executive Director Fatih Birol told Bloomberg television. Other market-watchers, such as JPMorgan Chase & Co. and consultants JBC Energy GmbH, say the growth rate will be even lower.

“There is downward uncertainty on the demand side,” Lars Christian Bacher, chief financial officer of Norway’s Equinor ASA said in a Bloomberg television interview.

Oil prices have slumped 17% from their peak in April to trade at $62.48 a barrel at 4:02 p.m. in London on Monday. Riyadh requires $85 a barrel to fully balance its budget this year, the International Monetary Fund estimates.

Deeper Cuts?

To combat the demand slowdown, OPEC+ could consider cutting production even deeper. Saudi Arabia had contacted other producers about what more can be done to prop up the market, an official from the kingdom who asked not to be named said last month.

Prince Abdulaziz signaled on Monday that he’s in no rush. Fuel consumption is still rising, not contracting, and the trade war between Washington and Beijing is unlikely to wreak serious economic harm, he said in a Bloomberg TV interview.

“The market is now driven by negative sentiment emanating from negative news, but I don’t believe that demand has been impacted,” the prince said.

The position could shift next year. With oil markets facing another flood of American shale in 2020, and only limited prospects for demand growth, Riyadh will have little choice but to organize a deeper production cutback, Citigroup Inc. predicts.

“The supply coming online in 2020 is overwhelming against any foreseeable demand number,” said Ed Morse, head of commodity research at Citigroup in New York. “If there is a slowdown in global growth in a recession scenario for 2020, it would be logical to expect they would co-ordinate a deeper cut for a short period.”

The possibility of further reductions makes it all the more crucial that Prince Abdulaziz can preserve Saudi Arabia’s partnership with Russia, which has proved to be its most important ally in the coalition, even though it’s not an OPEC member. It was his predecessor, Al-Falih, who established the OPEC+ alliance three years ago with his Russian counterpart, Alexander Novak, and the strength of the union often seemed to hinge on the personal rapport of the two men.

Russia has often required persuading to join the production cuts, and then to deliver them on time and in full, partly because the government can balance its budget at a crude price of just $49. The Kremlin must also placate local companies like Rosneft PJSC that are impatient to expand output.

“Russia is certainly now in a much better condition in terms of readily available cash” than when OPEC+ was founded three years ago, said Morse. “But if we get to the end of the year and markets continue to weaken, it would not be surprising” to see deeper cuts being considered.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, Christopher Sell

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