Why Riyadh cut production by another 1 million barrels: a view from Moscow

US, WASHINGTON (ORDO NEWS) — Saudi Arabia’s unexpected decision to cut production by another 1 million barrels per day is connected with the political game that the kingdom plays with Washington, said Leonid Krutakov, assistant professor of the Financial University under the Russian government.

The lower the demand in the global oil market, the clearer the situation. The more time passes since the conclusion of the OPEC + transaction, the more understandable the cause-effect relationships of the actions of Saudi Arabia. The deeper the decline in shale production in the United States, the more obvious the drive belts of this deal.

On May 8, Donald Trump once again spoke with the King of Saudi Arabia, Salman Ben Abdel Aziz Al Saud, over the phone. After that, Riyadh announced a reduction in production by 1 million barrels per day (b / s) in addition to the level (2.508 million b / s), which was fixed in the OPEC + agreement.

Chronologically, everything looked like this: on Friday, Trump speaks with the king. Saudi Arabian Ministry of Energy orders Saudi Aramco to cut production by an additional 1 million bpd on June.

“Following”, as you know, does not mean “because of” at all. The chronological sequence alone does not prove anything. But in this case there are additional markers.

Following a telephone conversation between the heads of the US and Saudi Arabia, White House spokesman Judd Deere said: “The leaders of the two states agreed that stability in global energy markets is very important, and reaffirmed the strong cooperation of the US and Saudi Arabia in defense.”

Anyone familiar with diplomatic norms understands that the second part of Deere’s statement is crucial. And if you recall that on the eve of the OPEC + deal (April 2), Trump threatened Crown Prince Ben Salman with the withdrawal of American troops from Saudi Arabia, then the situation becomes crystal clear. According to Reuters, Ben Salman was struck by Trump’s ultimatum, asking even his assistants to leave the room to discuss face-to-face situations.

There is nothing new in the absolute military-political dependence of Riyadh on Washington. Here the heat of passion that was in full swing before the conclusion of the deal is important. It is clear that Washington replaced Riyadh, who played a dumping game, who also tried to take advantage of the failure of the deal by buying up stakes in European companies such as ENI and Total on the low market. It is clear that the United States acted on a situation based on its national interests. It is clear that the next (unscheduled) reduction in production by Saudi Arabia could be caused by the same reasons.

To understand all this, just look at the situation in the US oil shale industry, where the threat of total bankruptcy is becoming increasingly apparent. The only question is why the Saudis are still trying to present themselves as the main architects of oil market stabilization. Although this is also understandable.

Formally, Russia and Saudi Arabia made equal commitments to reduce production (2.5 million bpd). And informally, Russia has made the most significant contribution to reducing global exports. How did it happen?

First, an equal reduction in Russia and Saudi Arabia is calculated from an equal level of production of 11 million bpd. At the same time, Moscow had to reduce real volumes, and Riyadh – fictitious ones. When the Saudis, after the March demarche launched a dumping attack on the market, into the battle under the guise of an alleged increase in productionall Saudi strategic reserves were thrown .

Simply put, the growth of Saudi production to 12 million bpd in April was verbal. It was not production that grew, but export volumes. Accordingly, after the conclusion of a new deal under OPEC +, the Saudis also reduced not oil production, but the amount of oil withdrawn from their already lighter reserves.

Secondly, questions are raised by the very principle of the OPEC + agreement, based on the level of domestic production. The starting point of a fair agreement to ensure a market balance should not be mining, but export. After all, OPEC is an organization of exporting countries, not oil producing countries.

Even if we agree with the figures of Saudi Arabia, the reduction in production by 2.5 million bpd is 27% of the volume of exports. Russian 2.5 million b / s is 48% of exports. The fact is that Saudi Arabia’s own consumption of oil products is only 1.5-2.0 million b / s, and the domestic market of Russia reaches 5 million b / s. As a result, with equal volumes of production cuts on paper on export markets, Russia suffers almost twice as much losses as Saudi Arabia (48% and 27%, respectively).

To understand the situation, Russian exports in April amounted to 5.189 million b / s, and Saudi – 9.4 million b / s. At the same time, the world market is primarily interested in reducing precisely export volumes. Riyadh, on the other hand, is cutting paper production and is demanding a proportional but not paper-cut reduction from other participants. We also emphasize that the Saudis retain substantial oil discounts, continuing the expansion policy in the European and Chinese markets.

The manipulations of Saudi Arabia with numbers are obvious to serious market players. The USA cannot be attributed to frivolous players. That is why Trump, saving the oil shale industry, could prefer pressure on the Saudi oil dynasty to the next appeal to the countries included in the OPEC + format.

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