Saudi Arabia: Shifting the Goal Posts
While the market has been focused on short-term issues such as OPEC’s success in rebalancing the market in 2018; its exit strategy after the expiry of the deal; and the risk that the market over-tightens, OPEC and its dominant player Saudi Arabia have been keen to shift the market focus towards the longer term. The key message that emerged from the latest OPEC/Non-OPEC Joint Ministerial Monitoring Committee is that producers shouldn’t limit their efforts to 2018 and instead should aim to extend the declaration of cooperation beyond 2018 in order to assure ‘stakeholders, investors, consumers and the global community that this is something that is here to stay’, and that producers ‘are going to work together’ within a longer framework for cooperation. The latest signal is a very powerful one as it signifies that Saudi Arabia is not only interested in the short-term rebalancing of the market, but is also keen to stabilise long-term expectations about long-run oil prices; and producer behaviour at times of increased supply and demand uncertainty and during structural transformation in the market. In a world in which many are expecting oil demand to peak in the next few decades, the monetization of oil reserves as quickly as possible is being presented as the only ‘rational’ policy for low-cost producers, if they are to avoid holding stranded assets or failing to maximize their long term revenues. This scenario, in which producers compete for market share, is extremely bearish for oil markets both in the long and the short term, as long-term expectations will eventually feed into short-term expectations. It is in this context that Al-Falih’s signal is important: it charts an alternative route in which oil producers would continue to cooperate and restrain output, even as the oil market becomes more competitive. While Saudi Arabia is charting for the market an alternative story based on cooperation with other producers lasting ‘decades and generations’, the challenges it faces are immense: maintaining cooperation in a more competitive world is very challenging and while producers have the incentive to cooperate, the cooperation between producers needs to take a different shape. For instance, producers should not only be concerned with low oil prices, but also be proactive when prices are too high, as high oil prices induce strong supply and demand responses. But this does not imply that cooperation is not possible or sustainable: As long as their economies are not diversified, the alternative of non-cooperation is also not sustainable. The market is yet to fully internalize the signal and will be looking closely as to whether the Kingdom will follow up with concrete steps to turn the signal into a credible strategy.