OPEC Cuts Deep To Save Cartel
With oil prices in free fall and the dawning realization that Great Reflation trade of 2017 is over, OPEC needed to do something drastic to remind everyone how important they are.
Moreover, with Qatar quitting the cartel last week it was then doubly necessary for OPEC to make the markets stand up and remember them.
So, after a few days of wrangling, a 1.2 million barrel per day cut was announced by OPEC, larger than the market was expecting.
The Trump administration is fuming today over this result.
Predictably, oil prices jumped on the news. All is right with their world, yes?
Well, yes and no. The Saudis need $80 per barrel oil. Russia doesn’t get its hair mussed below around $50 and even then it simply scales back government spending in line with oil prices — auto-budgeting based on oil tariffs.
The free-floating ruble insulates Russia domestically from a sharp drop in oil prices far better than Saudi Arabia since the Riyal is pegged to the U.S. dollar.
But for Saudi Arabia, the stakes are far higher. And its chief rival, Iran, understands this very well. The reason the OPEC meeting was so touch and go was Iran exerting its leverage over the Saudis in response to U.S. sanctions.
Because while Russia agreed to a 200,000 barrel cut, which is nothing to them in the grand scheme of things, Iran was exempted from making any cuts.
Iran, Libya and Venezuela will be effectively exempt from the cuts, though the text of the deal will say they received “special considerations,” Iraqi oil minister Thamir Ghadhban said.
Saudi Loss Leader
Saudi leadership is weakening. Qatar left to pursue its own ambitions without OPEC getting in the way. That’s a nice way of saying they want to do business with Iran developing the shared North Pars gas field.
Iran used the Saudis’ need for much higher prices to extract this major concession so that it can produce what it can sell. Iran will, by definition, maintain market share, possibly taking some from the Saudis because a tighter supply environment means customers will flaunt U.S.