What to Make of Saudi Arabia’s Recent Shift in its Output Policy?
After a sharp rise in April/May this year, which saw Brent trading at above $80/barrel for several days, the upward pressure on the oil price eased in July with the Brent structure flipping into contango. This may have come as a surprise to many analysts who were expecting oil prices to continue on their upward trajectory. Because, after all, with OECD stocks falling below the five-year average, spare capacity at very thin levels, oil demand still growing robustly, production in Venezuela continuing its decline, supply losses from Iran projected to exceed 1 million b/d, and general deterioration of the geopolitical backdrop, surely the Brent price should have broken the $80/barrel ceiling? Instead, the oil price has held in the $70-$75/barrel range for most of July and into August 2018. While fears of trade wars and growing concerns about the health of emerging markets have impacted sentiment, it is the recent shift in OPEC, and particularly its dominant player Saudi Arabia’s, output policy which has had the biggest impact on physical balances, prices and the term structure to date. This reflects in part changing market fundamentals and a more uncertain environment, but also changes in the weight attached to the various objectives pursued by the Kingdom. This comment examines the causes of the most recent shift in Saudi oil policy, its adjustment in output in July, and the implications of recent behaviour on its signaling power.