The then UK business secretary Kwasi Kwarteng (seated, blue robe) with
Saudi Energy Minister Prince Abdulaziz Bin Salman (seated to the right
of Mr. Kwarteng) and Amin Nasser, president and chief executive officer
of Saudi Aramco (seated next to Prince Abdulaziz) on an apparently
undeclared trip to Saudi Arabia in January 2022 [photo credit:
@Saudi_Gazette]
First, it is true that there are “mounting threats to Russian
supply”. However, she rightly qualifies this by noting uncertainty over
whether Europe will go ahead with sanctions on Russian exports from 5
December. My personal view is that the EU will. Europe has enough gas
stored to see it through the winter (albeit at a price); and there is no
sign of any real wavering in European determination to support Ukraine,
despite protracted haggling over the detail of further sanctions.
However, there is no categorical evidence to support the view that this
would trigger a fall in supply globally rather than obliging Russia to
sell its oil at a bigger discount wherever it can.
Second, Ms Sen underlines OPEC+’s willingness to take crude off the
market. However, a great deal will happen before its next meeting on 4
December. For starters, I am far from alone in being confident that
Riyadh pushed for a big cut this month with an eye to trying to
undermine the Democrats in the US midterms which will, of course, be
done by December.
Third, China. It is the case that Beijing is “slowly but surely
trying to boost economic growth again.” However, in the face of a continuing zero covid policy
as we enter the Northern Hemisphere flu season, the fragility of the
real estate sector and President Xi Jinping’s determination to bring the
tech sector under CCP control I remain doubtful that we shall see much
of an uptick.
To these, I would add a fourth and potentially critical point to which Ms Sen alludes only en passant. MbS is battling against market sentiment which is fixated on the prospect of the global slowdown/possible recession, as is borne out by the fact that Brent has now slid back to below US$92pb, i.e. only marginally above its pre-meeting price.
Herein, lies a paradox. By trying to push up oil prices, MbS is taking on the world’s major central banks
which are prioritising countering inflation over growth. Of course, for
public consumption Riyadh has tried to justify the cut by pointing to
the possibility of a recession-driven fall in demand; but, as the IEA implied last week, OPEC+’s actions risk this becoming a self-fulfilling prophecy.
As if taking on central banks was not enough, MbS has also elected to confront the West in general and Washington
in particular. While some of Riyadh’s complaints about the US are
justified, to be blatantly siding with Moscow at a time when even
Beijing and New Delhi have been cooling on Putin’s war is somewhat
perverse to say the least. As a 6 October FT leader put it:
“The Saudi crown prince risks overplaying his hand, as he has often done
in the past…. Pushing up oil prices now may only deepen any impending
recession and the resulting destruction of demand.”
This looks like going beyond the current, and escalating, war of words. Certainly, President Joe Biden seems determined to retaliate substantively, with the banning of arms sales to KSA a likely move. However, as far as oil per se
is concerned his options are limited. Releasing more crude from the
strategic reserve is an option (albeit one which may encourage OPEC+
towards further cuts in output). But beyond this:
- Cost and investors demanding returns make it unlikely that US shale will ride to the rescue;
- The turmoil in Iran makes a JCPOA renewal a real stretch; and talks with Venezuela seem unlikely to bear fruit;
- A ban on exports may help domestically but would cause major ructions with key allies in Europe;
- As for NOPEC
even if it were (finally) to pass Congress, its impact even in the
medium term is more likely to be provoking OPEC+ into tit-for-tat
further cuts rather than scaring it into capitulation.
Nevertheless, we do appear to have reached a watershed…and not just
in Saudi/US relations. As Fletcher School’s Amy Myers Jaffe (quoted in
the FT on 7 October) put it:
In its support of Russia’s request for production cuts,
Opec casts itself in a role that will hasten its own demise. Anyone who
can move away from oil will — national governments, businesses, cities,
consumers. Opec’s actions are simply a nail in a coffin that was already being built.
This being said, the final nail will clearly not have been hammered
home overnight and, for now at least, investors will continue to focus
on the battle between OPEC+ and central banks.
As far as this is concerned, I am steering clear of the herd and
still sticking to my January call of Brent in the US$80-90pb range come
31 December.