Saudi Arabia: Patience Is A Virtue In Oil Markets

• ▶Saudi Prince Abdulaziz bin Salman had a message for oil markets this week, that OPEC+ will continue to do what it is currently doing and, in time, there will be balance in oil markets

• ▶The prince also suggested that OPEC+ has plenty of spare capacity, although emphasized the importance of bringing this supply online gradually 

• ▶Another comment by the prince suggested that the relationship between Russia and Saudi Arabia is as strong as ever and OPEC+ is here to stay

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“Is it not time to add more barrels than OPEC is already providing?” was the question posed to HRH Prince Abdulaziz bin Salman by journalist Ryan Chilcote at Russian Energy Week.

But his answer offered the energy markets a much bigger message.

Balance is Coming

While he didn’t answer yes or no, his response certainly suggested that whatever OPEC+ was doing is precisely what it will continue to do.

“By end of this year, we will be at balanced stocks,” Prince Abdulaziz assured the forum, adding that the long game is what the market should be eyeing.  

“We should look way beyond the tip of our noses. Because if you do, and take ’22 into account, you will end up by end of ’22 with a huge amount of overstocks.”

The message here is clear. Balance to the oil markets is coming, even though OPEC isn’t going to add more barrels right now. OPEC is playing the long game - and if they add too many barrels in now, the market will again be oversupplied next year. So don’t hold your breath waiting for OPEC to give into U.S. pleas to turn on the taps - more than promised, that is - to bring down prices.

OPEC+ is staying the course.

Rest assured, OPEC+ has already agreed to lift production again in November, December, January, and February - by another 400,000 bpd each month, HRH added. And OPEC+ has already increased its production quota by 400,000 bpd in September and October.

But while the group has lifted actual production in response to these new figures, the overall production by the group has failed to meet the full allotted volumes.

Nevertheless, the increased production, should OPEC+ produce the full amount according to its plan, would be more than a million barrels per day on average between now and the end of February.

“We struck that agreement because we believe it would create a balance by this end of the year,” Abdulaziz said.

Yes, OPEC Has Spare Capacity

Setting aside the definition of spare capacity for a moment, which varies based on how long one thinks it should take a producer to ramp up production, the Saudi Prince confirmed that OPEC+ has spare capacity.

“...we want to make sure that we reduce these excess capacities that we have developed as a result of and the Covid and the consequences of Covid. We want to do it in a gradual, phased-in approach. And we believe we will have a challenging year in ’22 if we don’t attend to the situation remarkably with the same resolution.”

Some analysts would argue that OPEC+’s failure to ramp up production over the last couple of months as promised indicates that not all OPEC+ members have the spare capacity that they used to.

The IEA, which defines spare capacity as capacity that can be tapped within 90 days, estimates that as of the beginning of 2021, the spare capacity of OPEC+ totaled 9 million bpd. But production problems in Nigeria and Libya, sanctions on Iran and Venezuela, and more than a year of trimmed production in Russia and Saudi Arabia are eating into that spare capacity - or at best, rendering some of that spare capacity immediately untappable.

The EIA, on the other hand, defines spare capacity as that which can start up within 30 days. It is these differing definitions of “spare” that cause the market to worry that excess capacity won’t be there when the market calls for it.

Spare capacity is where the market power really is. Promising spare capacity is promising the market that you have the power to ramp production up to meet demand and keep prices at ideal levels.

Climate Change is Real And Trumps… Energy Security

A message about climate change was also touched on: it is an issue that is even more important than energy security - a rather bold statement given today’s unsettled energy markets in the midst of shortages.

“While we try to address energy security, we also should be mindful of the challenges and mitigation of a more important issue also, which is climate change. We believe solidly as OPEC does, that our job is to ensure the energy security when it comes to oil. But it takes a diversity of sources of energy for any of us to do that. Yet, we could also work with the other challenge, which is climate change.”

Long Live OPEC+

Russian President Vladimir Putin just days ago suggested that its deal with OPEC could continue beyond 2022. And now, the Prince is backing up that claim in his referring to Russia’s Alexander Novak as his “nearest and dearest” friend, adding that “energy markets need attendants, and needs a collaborate work.”

The concept of an ongoing collaboration between two oil-producing titans is a critical component affecting oil prices. With the U.S. now benched as a swing producer, Saudi Arabia and Russia are currently in the driver’s seat regarding price setting.

As such, any hint that the duo is headed for a breakup could send prices plummeting.

It Could Be Worse

Russian Energy Week also gave the Saudi Prince a chance to pat himself and the rest of OPEC on the back for a job well done. According to HRH, OPEC has done a great job balancing supply and demand.

Referring to climate change and energy security in tandem, HRH argued that it shouldn’t be a zero-sum game.  “I think there are ways forward - solutions forward - that enable us to address both, but address both comprehensively.”

Oil prices might be high - an “incremental increase of 29%” according to HRH, but that pales in comparison to the “500% increases” in gas prices or “300% increases in coal prices,” and “200% increases in NGLs”.

OPEC is the Energy Regulator

HRH sees OPEC as being in charge of the oil markets. It is not just a swing producer but a “regulator.”

“If these markets [gas, coal, NGL], if these industries were attended to as what we have done immaculately [sic] in OPEC+ - clearly we have a lot to congratulate ourself with… we have done a remarkable job of being the so-called regulator of energy markets.”