From The Wall Street Journal
Saudi Arabia has pledged to boost oil output if needed, as the Trump administration starts banning all Iran oil exports on Thursday.
But behind the scenes, Riyadh and Washington face a potentially weekslong showdown over the number of extra barrels the kingdom would supply to global markets to keep crude prices stable.
The U.S. is pushing to restart production in a field shared by the kingdom and Kuwait that could unlock half a million barrels a day, people familiar with the matter said.
But at the same time, Saudi Arabia—in need of higher oil prices to keep its state budget balanced—is lobbying within the Organization of the Petroleum Exporting Countries to change the way the cartel calculates whether the market is adequately supplied as a way to show the U.S. that no more oil is needed, people familiar with the matter said.
The Trump administration on April 22 said it would end the exemptions it granted to Iran’s oil buyers, aiming to bring its exports to zero.
The move comes after oil prices posted their strongest first quarter in decades, rising about 30%. Oil prices hit a six-month high last week as the U.S. manages an embargo on Venezuelan oil shipments and a rebel general’s offensive in Libya risks jeopardizing that country’s production.
Saudi Arabia is set to debate with other producers how much extra oil it should pump at a technical meeting in its economic capital Jeddah on May 19. But by hosting the gathering, “they fear Trump will be fixated by the meeting,” a person familiar with the kingdom’s thinking said.
Seeking new oil sources to avoid tensions in the market, State Department officials have prodded Saudi Arabia and Kuwait to resolve a dispute with Saudi Arabia over the jointly held oil field in the so-called Partitioned Neutral Zone, an area that straddles onshore and offshore fields to the north of the Persian Gulf, as a way to boost global supplies.
Three years ago, the countries shut the field, citing disputes about land and environmental permits.
The return of production there would help ease oil prices, as it would add to existing production potential rather than drawing down on spare capacity.
The countries have struggled to reach an understanding, however. A summit in September between Saudi Crown Prince Mohammed Bin Salman and Kuwaiti ruler Sheikh Sabah Al Ahmad Al Sabah ended in bitterness, people familiar with the matter said.
At stake is whether Saudi Arabia will act on its late-April commitment to boost output when needed. In a tweet on Friday, President Trump said he “spoke to Saudi Arabia and others about increasing oil flow. All are in agreement.” Saudi Arabia is set to increase output, a person familiar with its policies said, but has made no promises specifying how much extra oil it could bring to markets and when.
Saudi Arabia’s production will remain below 10 million barrels a day until at least the end of May, Saudi Energy Minister Khalid al-Falih told Russian state news agency RIA Novosti last week.
Any decision on future production would depend on oil “stocks—whether they are above normal levels or below,” Mr. Falih told RIA Novosti.
Meanwhile, the Saudi energy minister is trying to change the measurement of those stock levels to justify maintaining most of OPEC’s current production curbs, people familiar with the matter said. Saudi representatives at OPEC have “returned to their antics on metrics to evaluate market balance,” one of these people said.
OPEC currently uses a five-year average of oil inventories in industrialized nations to determine if it needs to cut its production.
In November 2016, the cartel decided to reduce output by 1.2 million barrels a day after estimating inventories had surpassed their optimal level by 271 million barrels. The surplus has now shrunk to 7.5 million barrels—putting the market virtually in balance.
The Saudis are reluctant to boost production again as they seek higher prices. They need the revenue to cover domestic spending that includes a generous welfare state and a war in Yemen. After Washington said it would end exemptions on Iran’s oil exports, prices recently rose to $75 a barrel—nearing the $80 a barrel the kingdom’s economists say will cover most of its spending.
The need for higher prices prompted the kingdom to reignite an OPEC debate over the accuracy of its market measurements, according to OPEC officials said. The Saudis “have been desperately trying to play down or even discredit the five-year-average” metric, the officials said.
Last June, Mr. Falih, the Saudi energy minister, failed to persuade fellow members to shorten the average period of reference OPEC uses. This would have made it easier to justify production cuts as the new time frame would have included lower oil stocks. Now, as the Trump administration asks Saudi Arabia to replace Iranian oil, Mr. Falih is making another push to lower the bar on OPEC’s glut measurement.
Mr. Trump “may be disappointed if he wants to another surge of one million barrels a day,” said Helima Croft, chief commodities strategist at Canadian broker RBC Capital.
