The Fuse

Saudi Arabia Confidently Shifts Its Price Target as U.S. Enters Summer Driving Season

by Leslie Hayward and Matt Piotrowski | April 17, 2018

Oil prices are up 60 percent since June with prices now around $70 per barrel, and the commercial inventory glut that lasted for several years and maxed out at a surplus of 400 million barrels has dropped to a modest 43 million barrels, meaning that OPEC should be declaring “mission accomplished” on its ambitious gambit to accelerate a rebalancing of the oil market. Saudi Arabia’s work isn’t done yet, and the country continues shifting its goals for where oil prices should be.

The new price target virtually guarantees that OPEC and its non-OPEC allies such as Russia will continue their production cuts into a third year in 2019.

A few months ago, the Saudis shifted their terminology around $70 oil from marking the ceiling to the floor, and now the Oil Kingdom is signaling that it wants to increase prices to $80 per barrel, or higher, in order to enhance the valuation for its planned initial public offering. This price target virtually guarantees that OPEC and its non-OPEC allies such as Russia will continue their production cuts into a third year in 2019. As a result of Saudi-led coordination, U.S. consumers will pay the highest amount at the pump this summer since 2014.

Shortly after OPEC began to reduce supply in early 2017, Saudi Arabia and its Gulf allies sought $60, believing that price level would be significant enough boost revenues but not lead to a rapid rise in U.S. shale production. Earlier this year, the Saudis upped its desired price to $70 for its budget needs. Now, the OPEC leader wants $80 despite the oil market nearing a possible tipping point with stocks falling, demand rising amid global economic growth, output declining quickly in Venezuela, and Middle Eastern conflicts developing into a proxy wars between major oil producers. Reuters reported Wednesday, quoting unnamed industry sources, that the Kingdom is seeking a price as high as $100.

The original objective for the Saudi effort was to “rebalance” the oil market and lift prices to a range that is good for both producers and consumers—but there is no question that those goals have already been accomplished. “The Saudis now realize that shale is not going to really hurt them,” one energy investor told The Fuse.

“The Saudis now realize that shale is not going to really hurt them.”

With the Saudis and others remaining aggressive with their cuts, consumers are having to spend more disposable income on fuel needs. For instance, U.S. summer gasoline prices will average 30 percent higher than two years ago, and in some places they are already well above $3 per gallon. Continued OPEC coordination could lead to tighter-than-anticipated markets and even higher prices. Saudi Energy Minister Khalid Al-Falih has remarked that increased prices are required to stimulate necessary upstream investment. While more investment is definitely needed to keep a supply gap from emerging, his argument, at this point, appears to be largely self-serving.

As Bloomberg noted: “Saudi Arabia wants to get oil prices near $80 a barrel to pay for the government’s crowded policy agenda and support the valuation of state energy giant Aramco before an initial public offering.” Saudi Arabia’s IPO, which would open 5 percent of Aramco to outside investors, is the basis of the country’s domestic economic reforms, but it continues to be delayed due to indecision about the IPO’s structure and on which exchange to list it. Furthermore, the Kingdom is struggling to reach the $2 trillion valuation that it is seeking, but analysts say that is very unlikely, unless triple-digit oil prices return.

The oil price collapse of 2014-16 and fears that shale oil production would permanently restructure the global balance of energy power struck fear into the hearts of many oil producing countries.

Indeed, the oil price collapse and fears that shale oil production would permanently restructure the global balance of energy power struck fear into the hearts of many oil producing countries that their market share and power was being eroded, and laid the foundation for renewed and sustained cooperation between countries with longstanding animosities. OPEC and Russian officials have discussed an oil-producer alliance that will last for “10-20 years” or “indefinitely” or “forever.” It is unclear for how long the coordination among the so-called Vienna Group will continue, but it is likely to last for the rest of this year and next, at least until Riyadh launches its IPO. Even if prices eventually hit $80, the Saudis will probably shift the target once again, saying they need $90 or higher. After all, it was not that long ago that then-oil minister Ali Al-Naimi said that $100 was a “reasonable” and “fair” price. “In 1997, I thought $20 was reasonable. In 2006, I thought $27 was reasonable,” he argued in 2013 when Brent was at $108. “Now, it is around $100 … and I say again it is reasonable.” Consolidated market power, and an ever-evolving determination of what’s reasonable, are conditions that oil consuming nations must take seriously.

Editor’s Note: This story was updated on Wednesday April 18 to include the latest report from Reuters about Saudi Arabia seeking a price target of $100. 

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