Skip to main content

The Globe and Mail

Saudi influence should calm an angry OPEC

Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail

Javier Blas is commodities editor at The Financial Times

Will OPEC retaliate against the western countries' release of strategic oil stocks by tightening its own supply to drive prices higher again? That question has haunted the oil market for the past week.

If you pay attention to the rhetoric, the answer could be yes. Abdullah al-Badri, OPEC secretary-general, has made strong comments against the International Energy Agency. "I hope this practice will be stopped and stopped immediately," he said. "We don't see a good reason to release this quantity and I hope the IEA will refrain from using this practice."

Story continues below advertisement

Yet a closer look at the fundamentals of the oil market, recent price action and the silence of Gulf countries suggest that Saudi Arabia and its allies at the OPEC cartel will make good on their promise to boost output.

Oil prices have weakened somewhat since the IEA announced the release of up to 60 million barrels over the coming month. Brent has dropped to around $105-$108 (U.S.) a barrel, the lowest in four months, down from a peak earlier this year of $127 a barrel.

Rather than oppose the price drop, Riyadh, Kuwait, Doha and Abu Dhabi would most probably welcome it. Oil prices still remain around $100 a barrel, a level that suits the Gulf countries as it secures strong revenues while mitigating the impact on the global economy (Saudi Arabia probably would not mind if Brent was to drop a bit further, to around $90-$100).

The impact of the release has also been strong on the spread between Brent crude and Dubai crude, something that Gulf countries would welcome in particular.

The only way that Saudi Arabia could have lowered the cost of premium quality, light, sweet Brent would had been by flooding the market with its own lower quality heavier, sour oil through big discounts. The discounts would have been necessary to entice refiners to process the low quality oil, which yields a significant amount of less popular fuel oil. Now, Riyadh would not need to discount its oil nearly as much, protecting its revenues.

The release has not altered the supply and demand gap in the third quarter and the fourth quarter either. The global economy will need extra oil from July to December. The IEA has clearly explained that its release is a stop-gap measure until the oil from the Gulf arrives. Saudi Arabia, Kuwait and the United Arab Emirates will still find a market for their extra oil.

Saudi Arabia remains likely to bring its production to at least 9.5 million barrels, the highest level in three decades. It is still early to see whether it would reach 10 million barrels, but if Riyadh sees the demand, the country has the capability to reach that level.

Story continues below advertisement

In private, Gulf countries are not making any retaliatory noises. Nor they are particularly happy about the whole affair. True, the hawkish side of OPEC, which include countries such as Iran, Algeria and Venezuela, would scream against it. But what really matters is Saudi Arabia and its allies. And they are not complaining.

Report an error
Comments are closed

We have closed comments on this story for legal reasons. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.