Saudi Arabia has had six oil ministers in just over 60 years. The first abhorred American dominance of Arabian oil and fought to end it; the second wanted low prices for greater market share; the third, a poet and soccer fan, did his job without fanfare; the fourth, a shepherd who rose to attend Stanford University, Harvard and Columbia, earned global praise in his 20-year term; the fifth helped create OPEC+ by bringing Russia into the fold.
The sixth has benefited immensely from the coronavirus pandemic that led to the death of the U.S. fracking boom and the competitive American spirit, leaving an emasculated shale industry that now does exactly what the Saudis want.
Prince Abdulaziz bin Salman, the incumbent Saudi energy minister, has an alternative ego as well: He likes to imagine himself as a ‘Dirty Harry’ who dispenses tough justice on the bears who dare to bring the oil market down by betting on lower prices of crude.
“Make my day,” the prince once said in a part-jest, part-dare to the short-sellers in oil, borrowing the taunt used on the bad guys by the maverick movie cop played by Hollywood legend Clint Eastwood in the 1970s and 80s.
Sunday’s surprise pledge to slash a total of 3.7 million barrels per day from the production of OPEC+ — which combines the 13-member Saudi-led Organization of the Petroleum Exporting Countries with 10 independent oil producers steered by Russia — featured the prince in his classic ‘Harry mode.’
The Wall Street Journal, reflecting on the decision that stunned markets across the world, not just those trading oil, said the Saudi energy minister appeared to be delivering on his promise from last year to act quickly and preemptively if he saw the market turning in the wrong direction.
Citing people familiar with the matter, The Journal said:
“Prince Abdulaziz has been concerned that traders and hedge funds were shorting oil, meaning they took positions betting that oil prices would fall, and he appeared to have decided to fight back.”
The element of surprise — something the minister clearly reveled in — could not be mistaken. According to Bloomberg, none of the 14 traders and analysts it polled ahead of Monday’s virtual OPEC+ meeting — where the production cut became policy — had any inkling of what was coming. Their expectation had been of no change to the original 2.0-million-barrels per day cut that OPEC had announced in November.
If Bloomberg’s narrative is right, the poll was deceived by the prince’s assurance from last month that the November cuts are “here to stay for the rest of the year.”
Bloomberg added:
“From time to time, the prince has delighted in wrong-footing speculators with unexpected supply changes. During one such intervention he warned that short-sellers would be ‘ouching like hell’, and for crude bears this latest move may be similarly painful.”
Even before the pandemic, as the swing producer of oil — meaning it has enough crude for itself and can still supply the world — Riyadh knew it could rely on traders’ fear of a supply squeeze to get the market moving its way. Yet, not one Saudi oil official had been as brazen about playing the fear card over the past three decades as this prince.
Back in September 2019, shortly after he came to power, he promised "hell" for oil bears who bet against OPEC.
Barely disguising his contempt for those who drove down oil prices by a combined 13% over a two-week period, Saudi Arabia’s new energy minister seemed keen even then in driving fear into short sellers than addressing their concerns about weak demand for energy amid the COVID outbreak.
Asked about OPEC+’s next steps at that time, the prince said the cartel would take proactive and preemptive measures to fix the market. His strategy to surprise, rather than inform, the trade was clear when he said:
"Anyone who thinks they will get a word from me on what we will do next, is absolutely living in a La La Land. I will make this market jumpy.”
Of course, one could argue that such threats were little more than humor-infused speech by the minister, who happens to be the elder half-brother of Mohammad bin Salman — Saudi Arabia’s Crown Prince who isn’t exactly known for his humility or humanity.
Since the 2014 shale boom overwhelmingly left pricing power for oil in the hands of many independent U.S. drillers, the Salman brothers waited for the chance to wrest back control and got it when the pandemic hit. Scores of Mom-and-Pop type shale drillers went bust overnight, not in the least from a glut of oil deliberately created by the Saudis in the early part of the pandemic due to a rare row they had with the Russians over output at that time.
When the dust settled a year later, the landscape for shale had undergone a 180-degree turn, with majors and corporates running the most prolific oilfields from the Permian to Eagle Ford and the Bakkens.
It was like manna from heaven for the Saudis. Regardless of which part of the world it was in, Big Oil spoke the same language and desired higher prices. And if higher prices could be achieved by following the Saudi Aramco (TADAWUL:2222) way, then be it.
The pioneers of shale were true heroes of American commerce whose wanton production could be faulted on the dynamic spirit of competition and non-collusion that’s unique to their land. So prolific US oil production once was that "Drill, baby, drill!" became its core spirit. However, the current thinking on the shale patch is, who needs pride and marbles if it means smaller profits? Or if there's an easier way to profit?
That thinking is perfectly reflected in a Reuters story on Monday that said U.S. crude production could nudge higher as a result of the OPEC+ cuts, but only by 200,000 barrels per day — or 5% of what the cartel will be slashing.
Publicly-traded companies will probably hold output levels unchanged even with crude futures at above $80 per barrel. However, private firms would have the incentive to boost activity, said Mike Oestmann, chief executive of Tall City Exploration.
Reuters reported that the United States pumped nearly 12.5 million barrels per day in January, citing latest government data. It added that production in the largest U.S. shale basin should grow by 400,000 barrels per day this year, about half the level in 2019, quoting an estimate by energy tech firm Enverus.
Despite such expansion, production remains well below the record high of 13.1 million barrels daily seen in March 2020, just before the onset of the pandemic. If all short supply in crude is taken into account now — from sanctions on Russia to the production outages from Africa to the Middle East and the massive OPEC+ cuts added from time to time — the world could easily do with 5.0 million more barrels a day.
The U.S. oil industry can certainly pump more, but it’s doing its best not to. Prioritizing cash returns to shareholders seems to be the popular excuse, although share buybacks are even more rampant. The unspoken tacit collusion with OPEC is at the heart of the defiance in ensuring prices stay high. The classic refrain that always comes up is that the Biden administration is a fossil fuels buster and not a dime of investment should be made in new oil.
But this same administration just presided over the largest oil and gas drilling rights auction in years in the Gulf of Mexico. Chevron Corp (NYSE:CVX), Exxon Mobil Corp (NYSE:XOM), and BP (NYSE:BP) were among the top buyers. Environmental groups Earthjustice and Friends of the Earth have lambasted the government for prioritizing oil and gas above climate goals and the health of Gulf coast communities.
Meanwhile, Saudi Arabia’s energy minister is shining for an ‘achievement’ that, in its roots, is more American than anything else.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.
