How Saudi Arabia is putting its money on tech for life after oil

August 13, 2018

Saudi Arabia, the world’s biggest crude exporter, is attempting to future-proof itself against oil’s decline by investing in futuristic technologies

Saudi Arabia has accumulated a stake in electric car maker Tesla for about $2 billion through its Public Investment Fund and aims to be part of any investor pool that emerges to take the company private.

The world’s biggest crude exporter is attempting to future-proof itself against oil’s decline by investing in futuristic technologies.

Saudi Arabia has accumulated a stake in electric car maker Tesla for about $2 billion through its Public Investment Fund and aims to be part of any investor pool that emerges to take the company private.

That’s on top of a $3.5 billion investment in ride-sharing company Uber Technologies, a $45 billion commitment to SoftBank Group Corp’s $100 billion technology fund and a planned investment of about $1 billion in Virgin Group’s space companies.

Neom, a planned $500 billion futuristic city that it’s hoped will host more robots than people on a desolate peninsula in the kingdom’s northwest is also part of the plan.

The metropolis will have a link “with artificial intelligence, with the internet of things — everything,” Crown Prince Mohammed bin Salman said in October, when Neom was announced.

The project includes a bridge spanning the Red Sea, connecting the proposed city to Egypt and the rest of Africa. Critics of the Neom plan point to past failed attempts to overhaul the Saudi economy that also included industrial cities in the desert.

While the International Energy Agency sees oil demand rising more than 10 percent to 103.5 million barrels a day by 2040, advances in vehicle efficiency, the rise of electric cars, tighter emissions standards and shifts to other fuel sources would result in crude demand much lower than the industry is banking on.

About 60 percent of oil is used in transportation, which is also where the biggest technological changes are emerging.

Diversifying the biggest Arab economy away from oil is central to the government’s Vision 2030 program and investments by its sovereign-wealth fund are a key component.

The government has called for shares to be sold in state oil company Saudi Aramco and for the PIF to become the world’s biggest sovereign-wealth fund, ultimately controlling more than $2 trillion.

As part of its Virgin Group deal, the PIF will invest in Virgin Galactic, The Spaceship Co and Virgin Orbit and have the option to invest an additional $480 million in the group’s space services, it said in October.

Saudi Arabia plans to support the ventures’ plans for human spaceflight and launching satellites into orbit and may cooperate with Virgin to create what the kingdom called a “space-centric entertainment industry” in the country.

The investment reflects the strides Saudi Arabia is making toward a “diversified, knowledge-based economy” by investing in “those sectors and technologies that are driving progress on a global scale,” the Crown Prince said when announcing the deal.

This article was first published in  arabian Business

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Saudi’s spare capacity in focus as supply outages rise

Time : July 14, 2018

Abu Dhabi: Saudi Arabia will be reluctant to exhaust its substantial spare capacity to offset shortfalls elsewhere in the market due to significant costs and risks involved, analysts said as pressure grows on the de facto Opec leader to further increase production to cool oil prices.

Saudi Arabia has a spare capacity of 2 million barrels per day which it will prudently use if and when necessary to ensure market stability and balance, King Salman Bin Abdul Aziz Al Saud told US president Donald Trump in a phone call last month.

“Saudi Arabia are bringing a lot of oil back to market and at this stage I think that’s the main thing keeping Brent in check. But, I’d be very surprised to see them use up all their spare capacity. It’s what allows them to manage the market the way that they do and giving that up is giving up something that’s hugely important to them strategically,” Emma Richards, senior oil & gas analyst at BMI Research told Gulf News by email.

“They benefit from a higher oil price and as long as its not destroying demand, they’ll be happy to see prices rise a little higher.”

Apart from this, bringing all of Saudi Arabia’s spare capacity into production will not be easy and would involve significant costs and will take six to twelve months, analysts said.

Saudi Arabia increased its production by 405, 4,000 barrels per day to 10.42 million in June in line with the agreement reached between Opec and non-Opec members last month to cool oil prices to stabilise markets.

Other countries in the group like the UAE and Kuwait too raised their production as per the deal.

The move comes after Trump criticised Opec in a series of tweets saying they are not doing enough to stabilise oil prices. “The Opec monopoly must remember that gas prices are up and they are doing little to help,” Trump said in a tweet on July 5.

Oil prices are currently trading higher due to growing demand and supply disruptions in Venezuela, Libya and Canada. The decision of president Trump to reimpose sanctions on Iran is also helping oil prices to move higher.

“It remains in our perspective that Saudi Arabia will increase its output albeit progressively. Riyadh will attempt to balance the equation between political influences from the US against its underlying interest with Aramco’s IPO,” said Benjamin Lu, commodities analyst from Phillip Futures in Singapore.

In a similar comments, Hussain Sayed, Chief Market Strategist, from FXTM said the US clearly wants to bring Iran’s exports down to zero by November, and given the current tight market conditions, Saudi’s oil production needs to be raised to unprecedented levels, along with other Opec producers, such as the UAE and Kuwait.

“I think Saudi Arabia is ready to pump more oil, the question is — how much can they pump? I don’t think additional two million barrels per day is possible at current stage as it requires time and investments to make such production sustainable. However, they will make all possible efforts to cover the shortfall elsewhere.”

This article was first published in  Gulf News

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How Saudi Arabia plans to price its oil

Time: July 09, 2018 

Aramco has used the average of the Oman and Dubai crude prices assessed by Platts since the 1980s as a benchmark

Lenin would not have dabbled in a capitalist activity such as oil pricing. Nevertheless he captured its essence. “Who whom?” – who can do what to whom – describes who sets prices and who just has to accept them. And Saudi oil giant Aramco has just decided that it will not be the one dictated to.

Aramco, the world’s largest oil company, is changing the basis on which it sets prices for its Asian customers. Since the mid-1980s, it has used the average of the Oman and Dubai crude prices assessed by Platts, a specialist energy information provider. It then applies a set of discounts or premia for each of its crude grades, to give a set of Official Selling Prices (OSPs). It adjusts these factors monthly depending on its view of the market, ensuring that it receives the best possible price while still being competitive for its customers. Kuwait, Iraq and Iran usually watch Aramco closely before setting their own OSPs.

But there have been no trades of Oman in the Platts pricing window in 2017 or this year, while the Dubai Mercantile Exchange (DME) has traded about 3,200 contracts daily this year. So Aramco will now shift from the Platts Oman assessment to using the Oman price quoted on the DME. Based in the Dubai International Financial Centre, DME is a joint venture of CME Group, the world’s largest futures exchange, Dubai Holding, Oman Investment Fund and a number of big banks and oil companies.

For now, Aramco has gone half-and-half, using the DME Oman price and the Platts assessment of Dubai prices. This may satisfy traditionalists within Aramco, but it will eventually be simpler for the company to shift over to using DME solely.

This move should track the market better, avoiding either leaving money on the table, or overpricing and struggling for market share. It may also lead to a slight gain in pricing because of the improved risk management for customers available from hedging. DME offers contracts on the spreads (difference) between Oman crude oil, Brent (the European and main international marker), and various oil products, allowing refiners to hedge their exposure between input and outputs. As the exchange gains liquidity, it enters a virtuous circle of becoming more attractive to traders.

Oman has priced its sales on DME from its launch in 2007, and Dubai adopted DME pricing in 2009. Now, where Aramco goes, others will follow. Iraq’s State Oil Marketing Organisation looked at switching to DME last year, but although it has sold some surplus cargoes through the exchange’s auction system, it has not yet changed its pricing model. Adnoc set up a new trading unit in April, and in general is testing new approaches across its businesses. A move to adopt DME looks likely here too.

The Bahrain Petroleum Company, only a small player, will probably also concur. In the Gulf, that will just leave Kuwait, Qatar and Iran to decide.

Still, it is not just the lack of trading on the Platts mechanism which has forced Aramco’s hand. In March, the Shanghai International Energy Exchange (INE) launched China’s first crude oil futures contract. As I wrote then, this move was inevitable, given Beijing’s desire for some control over its key imported commodity, but it was a concern for Middle East oil exporters.

The INE contract has several problems for traders – particularly, denomination in yuan, restrictions on crude imports into China, and the contract’s subordination to Beijing’s imperatives, which are in the direction of cheaper oil. An international, impartially regulated, dollar-denominated exchange such as DME will be preferable for most non-Chinese traders.

The contracts of INE and DME, which reflect similar underlying crudes, should trade closely in line. In practice, INE has traded often at a discount to DME, when it should be at least $2.50 per barrel above, allowing for transport costs from the Middle East to China.

In May and June, Asia’s largest refiner, China’s Sinopec, announced it would cut its long-term contract purchases from Aramco by 40 per cent. With usual variation only allowed within a range of plus or minus 10 per cent, Sinopec was playing hardball, arguing that Aramco’s prices were too high.

The Chinese state firm may also have been looking ahead to the possibility of acquired discounted cargoes from Iran as sanctions tighten.

Sinopec’s stance could be just a foretaste of what could happen as China’s oil thirst swells. In 2015, Sinopec and PetroChina, the largest Chinese oil firms, were accused of squeezing the market by acquiring nearly all the available Oman cargoes. Asia imports some 22 million barrels of crude daily, of which China hit a record high of 9.6m bpd in April. The Arabian Gulf countries collectively export about 19m bpd, and from this 5m bpd is Saudi crude to Asia, now under the new pricing methodology.

With the growing self-sufficiency of North America, and long-term expected decline in European demand, Asia is the key crude market today and tomorrow for the Middle East.

The key question is, who leads and who follows. Aramco’s decision puts DME in the driving seat, and it will be in an even stronger position if other Middle East producers follow. Aramco may not be able to fix the price of oil, but they can at least ensure it is not set six thousand kilometres away.

Robin Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis

This article was first published in The National

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The Saudi Oil Gateway to Global Stability

Time: July 06, 2018

​Salman Al-dossary

Salman Aldosary is the former editor-in-chief of Asharq Al-Awsat newspaper

Some two and a half years ago, oil prices dropped to around $28, a matter which raised panic worldwide and left everyone rushing in to save the markets from any collapse. Run down rates are not something oil producing countries or consuming countries consider favorable.

Gradually, oil rates recovered, seeing the price per barrel touch on $75.

Today, despite the hike in oil rates, the very same alarm is haunting global markets once again.

Oil markets function on strange and complex grounds, because they depend on a bendy commodity that is unique to itself.

Soaring rates are undesirable as they could predicate a major global economic crisis, affecting not only buyers, but even producing countries. On the other hand, a steep decline stirs reluctance among exporters to invest in oil, therefore drying up the markets.

Globally, there is an overwhelming consensus on oil having to be tied to fair pricing so that it balances the interests of both consumers and producers alike.

Buyers do not look for a significant drop in prices, as it is harmful to them, just as much as pricey rates.

Saudi Arabia, one of the world’s top oil produces, paved the way for an unprecedented oil deal between Organization of the Petroleum Exporting Countries and non-OPEC producers to roll back production by 1.8 million barrels a day, the measure which helped rebalance the market over the past 18 months and raised oil to around $75 a barrel, compared to $27 in 2016.

Riyadh, once again, announced its willingness to step in and compensate for any shortage in market supply, for its extraordinary ability to bridge the gap dug up by countries like Venezuela and Iran.

Venezuela’s capacity for oil production has been slashed by internal problems, while Iran faces inhibiting economic sanctions that will see the world market lose up to 900,000 barrels a day.

Not to mention that neither Libya nor Angola’s production is stable.

All of which has practically reduced global supply to about 2.8 million bpd in recent months.

Over the last three weeks, oil production has dropped daily, with half a million barrels being lost in Libyan oil, 325,000 barrels from Canada and 300,000 from Venezuela, leaving Saudi Arabia as the sole gateway to make up the gap.

Saudi Arabia aims to balance the oil market, and not set a specific price for what is modernly known as black gold.

The kingdom’s capacity to produce 12 million barrels per day makes it all the more integral factor in stabilizing the market.

Even as Russia and other Gulf countries increase their production rate to compensate for the shortfall, Saudi Arabia is the only country that can dispel fears of emerging countries, and ensure that oil will not register jacked up prices that the world simply cannot afford.

As a leader in the oil market, Saudi Arabia has always demonstrated its skillful ability to wisely use its national stockpiles in a way which balances the oil market.

In the aftermath of the Iraqi invasion of Kuwait in August 1990, about 5 million barrels of Iraqi and Kuwaiti oil suddenly disappeared from the market. During the invasion’s early days, prices shot up to about $26 and then to $28 per barrel, worryingly reaching $46 in October that very year. Such rates at the time were considered a disaster for global economy.

However, Saudi Arabia played the largest and most important role in restoring stability to the oil market, forcing OPEC countries—despite them expressing a strong desire to exploit the situation and keep inflated prices– to listen to reason and pump oil supplies into the market to compensate for what was missing.  It personally undertook replacing about 60 percent of lost production.

Surely no one can tell whether prices go up or down.

Global economies may even witness a barrel standing at a $100 in the next few months, a hike in rates just as unpredictable as 2016’s staggering drop to $27 dollars a barrel.

Nevertheless, some producers and buyers are capable of controlling and stabilizing markets.

Undoubtedly, Saudi Arabia comes across as the most reliable country for the task, given its solid strategy to strike a balance between supply and demand, and save the world from dire economic crises brought about by a volatile oil market.

This article was first published in Asharq Al-Awsat 

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Expect volatility as Opec challenges shale on the supply front

Time: July 04, 2018 

The middle of 2018 is meeting the end of 2014. That’s the last time the oil markets saw spot Brent Crude prices at the level of just under $80 (at the time of writing). The trend appears to be a return to pre-crash prices, at least from a bullish point of view. The question is, do the fundamentals of supply and demand support this perspective?

There are several drivers behind the current situation in the oil markets. Opec’s recent meeting in Vienna confirmed investors’ impressions that the supply taps would be turned back on. But – and it’s a big but – the bulls are not convinced that enough supply can reach the markets quickly enough to cover the shortfall from Iran and Venezuela.

The EU and UK may be diverging from US sanction policies on Iran, nonetheless the dampening effect of Donald Trump’s renewed economic pressures cannot be denied. Oil markets anticipate a shortage of two million barrels per day. Opec’s adjusted output deal is for Kuwait, Russia and Saudi Arabia to ramp up an extra 1 million bpd, leaving a potential shortfall of 1 million bpd for the short term. The bulls may be taking a bet that increased demand will outstrip supply over the next few months, driving the price up as a result. In other words, speculation may override the facts of demand and supply until the next definitive benchmark releases by the US’ Energy Information Administration and Opec in July.

At the geopolitical level, upcoming mid-term elections in the US are putting Mr Trump in the hot seat amid rising petrol prices. Ever since the 1970’s oil crisis, high fuel prices have been a significant trouble spot for the politicians in charge at the time. West Texas Intermediate prices may be relatively lower than Brent Crude, but consumers in the US will not take kindly to being out-of-pocket at the petrol station.

Mr Trump’s sanctions on Iran may have a boomerang effect on his popularity come November and he is aware of this judging from his tweets about Saudi Arabia agreeing to increase supplies. US shale may be steadily increasing its output, but US inventories show a big difference between the week ending June 22 and the equivalent period in 2017.

Stocks for the period in 2018 were at 425,352 (thousands barrels) compared to 509,203 in 2017. That’s not scraping the bottom of the barrel by any means; still, it’s a trend to take into consideration given that Opec has decided to challenge US shale on the supply front. Let’s remember that the US has increased its exports of crude oil and reduced its imports, meaning that in the case of a supply shortage over the next few months, Mr Trump’s policy of protectionist energy independence may be impacted by reduced US stocks and rising WTI prices.

It appears that the oil markets are in a phase of renewed imbalance rather than re-balance. Opec’s price range target of $55 to $65 for 2018 has been overshot on the back of Iran and Venezuela’s woes and US sanctions. It’s going to be an expensive campaign for Opec plus Russian producers to match US production and output levels at such a fast pace, so clearly investors have their work cut out for them to anticipate the next movements in Brent Crude spot prices.

In the case that benchmark prices keep rising and supplies/inventories falling, we could see Brent trading in a range of $70 to $80 per barrel in the third quarter. The alternative scenario is that supplies from US shale and Opec producers come through faster than expected, meaning Brent may trade in a range of $65 to $75 per barrel in the short term. Given the current complexity, either scenario is possible at this point, and I continue to expect volatility in the oil markets over the next few months.

Hussein Sayed is the chief market strategist at FXTM

This article was first published in The National

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World’s richest oil reserve spot located between two valleys in Saudi Arabia

Time: June 27, 2018

A Saudi geological study revealed the existence of a geographical spot in the Kingdom, considered the richest oil reserve in the world, according to Professor Abdul Aziz bin Laboun, a former oil adviser at Aramco and a professor of geology at King Saud University.

The Saudi expert said that the spot is between al-Sahba wadi (valley) and al-Ramma wadi south of Batha border, and is considered the world’s richest with natural resources.

Both wadis are considered the world’s driest, according to their surface perspective, and carry between them the one of the world’s vast wealth of oil and gas.

Bin Laboun added: “This spot is considered the richest in the world with natural resources from gas to oil and it includes the Saudi Ghawar oil field which is the biggest land field, Burgan oil field in Kuwait, which is the second land field and the Safaniya oil field in Saudi which is considered the world’s biggest sea field.”

The geology professor further explained that beyond the two wadis there are more than 100 gas and oilfields in a number of Gulf countries, but mostly in Saudi Arabia, making the two wadis the world’s richest with oil and gas reserves.

Experts estimate that oil reserves in this spot to be at 440 billion barrels, which makes it a huge amount in a very narrow geographical spot.

This article was first published in Al Arabiya English  

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Saudi leads renewable energy developments with $7bn in new tenders

Time: June 23, 2018

Saudi Arabia, the world’s biggest oil exporter, is expected to lead renewable energy developments this year with up to $7 billion worth of new tenders, according to an official from the International Renewable Energy Agency.

“Saudi Arabia has huge potential because it has a big market and has very ambitious renewable energy targets,” said Rabia Ferroukhi, head of policy unit at the Abu Dhabi-based agency “The regulatory environment is well established now to conduct auctions and attract investors.”

This article was first published in The National

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Saudis seek to keep control of oil market with Opec deal fudge

Time: June 23, 2018

Russia will probably lift output as much as it can while Saudi Arabia attempts to adjust its production to manage prices

London: When Iran’s oil minister stormed out on Thursday night, the alliance of producers led by Saudi Arabia and Russia was in danger of losing control of the market.

Less than 24 hours later, they had reasserted their authority — for now. Prices that had breached $80 a barrel in the run-up to the meeting, prompting public admonishment from US President Donald Trump, traded back at $75 (Dh275.25).

Friday’s agreement was a fudge in the time-honoured tradition of Opec, committing to boost output without saying which countries would increase or by how much. It gives Saudi Arabia the flexibility to respond to disruptions at a time when US sanctions on Iran and Venezuela threaten to throw the oil market into turmoil.

“It is very clear that Saudi Arabia, worried about prices running higher going forward, is trying to put in place a near-term cap on prices,” said Yasser Elguindi of Energy Aspects Ltd, a consultant. “Having secured its floor, Riyadh would like to see a near-term ceiling of $75.”

That’s a shift from only a few months ago, when the kingdom had made clear it was comfortable with prices at $80.

“We know prices in the three digits were causing instability” in 2011-2014, Saudi Oil Minister Khalid Al Falih said on Friday. “I can tell you that as we approach that range of prices, we feel that instability would be back.

This article was first published in Gulf News

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A Sour Outcome From OPEC for China’s Futures

Time: June 22, 2018

Here’s an indicator of what’s been driving the demand side of the oil market of late: Cargoes of Saudi Arabia’s main Arabian Light crude bound for Asia, which tend to be priced at a discount to Brent, last week reached their biggest premium to the European benchmark in six years.

The reason for this isn’t hard to discern. Gulf producers like the OPEC members meeting in Vienna on Friday can choose to send their cargoes east or west, and will raise prices to whichever market seems most likely to tolerate higher costs. In recent months, that’s been Asia, where (as we’ve written) demand has been surging. Should this week’s OPEC meeting end up with a boost to output driven by Saudi production, as many analysts expect, watch out for that dynamic reversing.

To see why, it’s worth considering the many flavors of oil out there.

The Brent and West Texas Intermediate benchmarks are sweet, light crude, with relatively low proportions of sulfur and high shares of the short-chained hydrocarbons that go to make up most transport fuels. They tend to be priced at a premium because they’re easy for refineries to process.

Arabian Light is different. Despite its name, it would be counted a medium sour grade under most definitions of the term. Its API gravity – a measure of the proportion of long-chain heavy hydrocarbons – is 32.5, compared with the lighter 35-to-45 ranges for WTI and Brent. Indeed, it’s more or less interchangeable with the new medium sour futures that the Shanghai Futures Exchange is hoping to establish as a rival benchmark to the New York and London contracts.

Medium sour grades are also the major ones produced by the Organization of Petroleum Exporting Countries and its allies, comprising about 85 percent of output by Russia and Saudi Arabia, 75 percent from Iraq, and almost all the production from Iran and Kuwait in 2016, according to Eni SpA. Only in the U.S., the North Sea and Nigeria among major producers do sweet, light grades account for more than a sliver of the total.

Oil refineries tend to be picky about the balance of crudes they process and can’t easily reconfigure to take a different slate of hydrocarbons. Thanks to the flood of light grades from the U.S. onshore shale boom and the declining supply of heavy Venezuelan crude, the average gravity of oil being consumed by American refiners is now the highest it’s been since the 1980s. With refineries running flat-out processing onshore North American oil, they’re likely to be a less attractive destination for increased Opec output than markets in Asia.

As my colleague Julian Lee has written, the vast majority of the spare capacity within Opec and its allies sits with Saudi Arabia, Russia, and other Gulf countries – producers, in other words, that are weighted toward medium sour. As a result, one way of looking at the mooted 600,000 barrel-a-day increase is a load of supply being dumped on the Shanghai and Arabian Light markets, with a more indirect effect on Brent and WTI. That should reduce those premiums for Asian crude to more normal levels, and even bring back the habitual discount.

For the Shanghai exchange, this will prove an early test of the new medium sour contract launched in March. While volumes have been healthy – occasionally even overtaking those of Brent – and bid-ask spreads indicate a reasonably liquid market, the daily peak in trading still seems to be in the late afternoon GMT, when U.S. and European traders are battling it out but their Chinese counterparts are mostly asleep.

This indicates the global oil market is still being steered from the North Atlantic, with Shanghai futures ultimately following Arabian Light and by extension Brent and WTI, rather than vice versa. Only when that changes will China have a home-grown oil benchmark worthy of the name.

To contact the author of this story: David Fickling at dfickling@bloomberg.net

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net

Italy’s Eni SpA, which does the most comprehensive public analysis of oil quality, puts the dividing line between light and medium grades at 35, though other analysts go for figures in the low 30s that would include the Saudi product.

This article was first published in The Washington Post 

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After OPEC, oil market enters a new era: Kemp

Time: June 19, 2018

LONDON- OPEC is changing fundamentally as power in the oil market shifts towards Saudi Arabia, acting in concert with Russia, while the other members of the organisation are increasingly marginalised.

In theory, all members of the Organization of the Petroleum Countries are equal, and the group has always taken decisions by consensus (“Statute of the Organization of the Petroleum Exporting Countries”, 1961 and 2012).

OPEC’s founding statute stipulates that it “shall be guided by the principle of sovereign equality of its member countries” (Article 3).
In practice, some members of OPEC have always been more powerful than others, but that imbalance has been widening, with Saudi Arabia becoming the dominant decision-maker.

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Saudi Arabia’s oil production overtook Iran’s in the 1970s, and the gap has grown steadily wider as a result of the Iranian revolution, the Iran-Iraq war and multiple rounds of sanctions.
Saudi Arabia is the only member of the organisation with a large enough share of output to have a measurable influence prices and the budgetary flexibility to adjust its production significantly.

In reality, Saudi Arabia decides how much to produce given market conditions, playing the role of swing producer, while the other members of the organisation essentially produce as much as they are technically able.

GULF ALLIES

Since the late 1990s, Saudi Arabia has increasingly coordinated production policy with neighbouring Kuwait and the United Arab Emirates, largely ending their former rivalry and accusations of cheating.

These three Gulf countries have become the core of OPEC, with the other members playing a peripheral role in output policy.

The balance of power within OPEC has been shifting towards Saudi Arabia and its allies for the last 20 years, but production problems in other member countries have accelerated the trend in recent years.

Venezuela’s output has fallen sharply as a result of mismanagement and internal unrest. Libya’s production has been cut by the country’s civil war.

Nigeria and Angola are suffering from chronic production problems. Iran’s output has been hampered by repeated rounds of sanctions.

Iraq is the only OPEC member which has experienced a significant increase in output since the country has recovered from the 2003 U.S.-led invasion and ensuing internal security problems.

But Iraq has always attempted to maximise output because of its enormous need for revenues to meet heavy budget commitments and it plays little practical role in OPEC’s production policy.

Since 2011, Saudi Arabia and its key allies have consistently accounted for around 48-49 percent of total OPEC output (“Statistical Review of World Energy”, BP, 2018).

More importantly, Saudi Arabia and its allies account for almost all the organisation’s spare production capacity and therefore almost all its production flexibility.

Saudi Arabia and its allies accounted for most of the voluntary production cuts implemented during 2017/18 and now hold most of the spare capacity that could be made available to the market in 2018/19.

Saudi Arabia has around 2 million barrels per day (bpd) of unused output capacity, while the UAE has around 330,000 bpd and Kuwait around 220,000, according to the International Energy Agency.

Most other members of the organisation have only negligible amounts of unused capacity that could be readily and reliably available to the market (“Oil Market Report”, IEA, June 2018).

And among the three Gulf allies, Saudi Arabia has by far the largest production and unused capacity, cementing its role as the de facto leader of OPEC.

RUSSIA

OPEC’s biggest problem in attempting to manage the oil market has always been its inability to control production from countries which remain outside the organisation.

OPEC’s efforts to stabilise and raise prices have frequently been undermined by the growth of alternative sources of supply (Alaska, China, the Soviet Union, the North Sea and now the shale fields of North America).

Saudi Arabia, as OPEC leader, has made repeated overtures to non-OPEC countries since the mid-1980s to restrain their production, with uneven success.

Since 2016, however, Saudi Arabia has forged an effective working relationship with Russia and a group of other, smaller non-OPEC producers to limit output.

Just as Saudi Arabia has dominated OPEC, Russia dominates the group of non-OPEC allies, contributing most of the output, production cuts and spare capacity.

In effect, Saudi Arabia and Russia have emerged as joint market managers, with other OPEC and non-OPEC countries relegated to a marginal role.

NEW ERA

OPEC is no longer the primary decision-making forum for producing countries trying to coordinate policy on output and prices.

Real decision-making power has passed from OPEC and its group of allies into the hands of Saudi Arabia and Russia.

Saudi Arabia and Russia have been careful to maintain the formal involvement of OPEC and the wider group of countries, known as OPEC+.

But the real decisions on production policy are now being made bilaterally and outside the OPEC and OPEC+ structures.

The marginalisation of OPEC as a formal decision-making group was evident during the organisation’s meetings in Vienna between June 20 and June 23.

Despite four days of discussions, OPEC and OPEC+ failed to reach a detailed agreement on production policy in the second half of 2018.

The final communiques issued after the OPEC and OPEC+ meetings did not specify either a formal output ceiling or country allocations.

Instead, it was left to Saudi and Russian officials to brief the media afterwards that collective output would increase by around 1 million bpd.

Saudi Arabia and Russia will contribute almost all the increase in output, with smaller contributions from Kuwait and the UAE.

In theory, this decision was taken by consensus among OPEC and non-OPEC members, with Iran and other members persuaded to give their assent to a vague joint statement.

In practice, Saudi Arabia and Russia are likely to have increased their production by 1 million bpd, whether other OPEC and non-OPEC countries agreed or not.

If Iran or any other country had walked out of the discussions, it would not have made any practical difference to the amount of oil supplied to the market in the second half of 2018.

BEYOND OPEC

Saudi Arabia is keen to maintain the formal structure of OPEC and non-OPEC cooperation; the consensus outcome of the meetings was an important step towards that objective.

But the preservation of the OPEC+ group masks the fact real power in the oil market has shifted decisively to Saudi Arabia and Russia, with some political input from the United States.

Saudi and Russian market power will become even more evident in the second half of 2018, if the two countries proceed with the agreed increase in production.

Assuming Saudi Arabia and its two Gulf allies increase their combined production by 700,000-800,000 bpd, their share of total OPEC output will climb above 50 percent for the first time since the mid-1990s.

And if Venezuela’s output continues to fall, which seems likely, and Iran’s production is curbed by U.S. sanctions, the three Gulf allies will see their share of OPEC output climb to the highest level since 1981.

By 2019, the oil market will have less than 1 million bpd of spare production capacity, essentially all of it located in Saudi Arabia.

Saudi Arabia will exercise more market power than at any time since the Iranian revolution and Iraq’s invasion caused Iranian output to plummet in 1980/81.

Market power will be in the hands of Saudi Arabia, and to a lesser extent Russia, not OPEC or the broader OPEC+ group.

The formal structures of OPEC and OPEC+ decision-making will remain, but real power has shifted elsewhere.

This article was first published in Zawya

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