Sunday / December 16.
HomeMarketsSaudi prince’s ambition forces Opec deal

Saudi prince’s ambition forces Opec deal

Opec’s production cut this week to bolster oil prices may strike many as a throwback to an earlier era, but it hinged on a very modern method of communication: a messaging group between the smartphones of Saudi Arabia’s delegation in Vienna and Prince Mohammed bin Salman al-Saud.

For a royal priding himself on being a tech savvy moderniser in the kingdom, the use of a popular encrypted messaging service may seem apt.

However, his involvement in directing the decision in Vienna illustrates a wider truth: Saudi Arabia’s oil policy is now closely entwined not just with the views of the young prince, who has quickly emerged as the most powerful and controversial figure in the kingdom’s economy, but also his political standing.

MbS, as he is known in diplomatic circles, risked seeing his bold plans to move Saudi Arabia’s economy beyond oil come unstuck as two-and-a-half years of low crude prices proved too much of a shock for the kingdom. 

Sub-$50 oil has hammered the stock market, while private sector spending has dried up and generous public spending programmes have been curbed.

Changing vision of a prince

To shore up his main goal, known as Vision 2030, MbS has in recent months embraced the notion of Saudi Arabia once again acting to influence oil prices, reversing the kingdom’s dalliance with allowing the market free rein.

While MbS is King Salman’s favoured son, he is not heir to the throne. His older cousin, Crown Prince and interior minister Muhammad bin Nayef, is the heir apparent under the traditional rules of Saudi Arabia’s royal succession.

Failure to right the economy could expose MbS’s position in a country where the social compact between the royal family and the population has long been based on rising wealth.

“His chance to become king rests on this succeeding,” says Helima Croft, a geopolitical analyst at RBC Capital Markets. “The problem for MbS is that all the pain of Vision 2030 is front-loaded. He needs more money in the kitty to keep the population’s support.”

Oil market watchers say the problems facing the Saudi Arabian economy help explain why the kingdom has aggressively pursued the first supply cut since 2008, reversing course just two years after it first led Opec in a pump-at-will policy to try and stave off the threat of fast-rising output from US shale drillers and other higher cost producers. 

The oil price was not responding fast enough to Saudi Arabia’s attempts to squeeze rival producers, falling further and remaining lower than they had feared.

“Over the past two years, everyone thought the US production would be completely depressed. But it wasn’t. We thought Russia would pull back. It has only gone up,” says one Gulf delegate.

In reaching a deal in Vienna this week, Saudi Arabia wanted to ensure that it was not going to be the oil industry’s fall guy. While Saudi has grown rich and influential from its status as the biggest oil exporter, it has grown tired of being the so-called swing producer — raising output when supplies were too tight or cutting back when prices fell too far.

Big diplomatic push

That meant embarking on a big diplomatic push to bring not just the other 13 Opec members on board, but also major producers from outside the cartel like Russia, which pumps even more oil than the kingdom.

After talks in April to secure a deal to freeze output failed, Khalid Al Falih, former chief of the kingdom’s state oil company and close adviser to Prince Mohammed, was appointed energy minister. He enabled a drive not only to quickly get despondent Opec peers on side but also its non-Opec rivals.

MbS worked alongside Mr Falih, securing the backing of Russia in stabilising oil markets after meeting with Russian president Vladimir Putin. This was in spite of their political differences over the war in Syria.

“Saudi Arabia has been very active with the Russians at both a political level and a technical level,” says one Opec delegate, citing a change from 2014. “Privately everyone was aware of the willingness of the Russians to co-operate.”

Other Opec members, including Venezuela and Algeria, rallied to the cause, launching multiple rounds of shuttle diplomacy to bring Saudi Arabia’s arch rival Iran to the table, despite Tehran’s opposition to cutting production as it recovers from years of western sanctions.

By late September, Opec was able to agree a provisional pact in Algiers to cut output by roughly 1m barrels to 32.5m barrels a day, significant enough they believed to mop up excess supplies. 

Down to the wire

The thorny details of distributing cuts among members was punted to this week’s meeting in Vienna. Oil prices, which had briefly jumped to a year-high after Algiers, had fallen back as members squabbled.

Ahead of Wednesday’s meeting, the three most powerful members in Opec — Saudi, Iran and Iraq — staked out their conditions for a deal, which left many observers thinking that they remained too far apart for an agreement.

While willing to exempt Nigeria and Libya, Saudi insisted that Iran freeze its oil production close to 3.8m b/d, Iraq cut its output and all producers comply with third-party data used by Opec to assess output. It also said that any deal was conditional on non-Opec participation.

Quietly, a diplomatic dance unfurled that would allow most members to spin a face-saving compromise. Iran would be part of the deal, but the 3.8m b/d target was above its actual output.

On Tuesday, a call from President Putin to Iran’s President Rouhani, in which he said that Russia would join the cuts, helped nudge Tehran towards the deal. 

“Putin gave Iran the relevant reassurances,” a second Opec delegate says.

Algeria also leaned on Iran the night before the official gathering in Vienna. By the time ministers gathered for breakfast at the Saudi hotel on the morning of the meeting, Iran was on board. 

“The issue with Iran was dealt with swiftly,” says Guillaume Long, Ecuador’s foreign minister who headed the country’s delegation. “The Algerians played a crucial role in trying to find a way out: Iran was given a margin in which to grow.”

Iraq found itself isolated. Bijan Zanganeh, Iranian oil minister, made pointed comments about all members being involved and using the same methods to assess members’ production — a sticking point for Iraq.

Oil surge the turning point

Delegates at the meeting say that Iraq eventually decided to support a deal once they saw the oil price surge on Wednesday as news leaked that the cartel was close to a deal.

“When the price started to go up Iraq felt this deal was in their interests as well,” another Gulf delegate said.

Iraqi oil minister Jabar al-Luaibi called Iraqi president Haider al-abadi from inside the meeting to get his final approval, according to another delegate. He said yes.

Saudi Arabia and its Gulf Arab allies, including Kuwait and Qatar, have agreed to shoulder the bulk of the cuts © Bloomberg

It is not clear whether Mr Falih messaged MbS to tell him the deal was won. But by the end of Wednesday oil prices had risen almost 10 per cent, closing above $50 a barrel and then surged beyond $54 on Thursday, adding another 5 per cent. 

The kingdom will make the biggest cut, reducing its output by almost 500,000 b/d, though its production will still be above 10m b/d, higher than when it first opened the taps in late 2014.

Economists say the price will need to rise to more than $55 a barrel to avoid the kingdom running a deficit.

MbS is moving ahead with plans to list part of state oil company Saudi Aramco to raise cash for his diversification drive, which will benefit from a higher price. 

“The Opec agreement came from the highest level,” says Yasser Elguindi at Medley Global Advisers, “Saudi leadership was under pressure to get a deal done.”

Additional reporting by Simeon Kerr

Source link