A meeting of 16 oil producers in Doha, Qatar ended without a resolution on Sunday 17 April after Saudi Arabia’s deputy crown prince said he would not curb output without participation from all OPEC members, including Iran. In the wake of the failed accord, it’s the prince’s other threat that has market participants worried.
“If all major producers don’t freeze production, we will not freeze production,” Saudi Prince Mohammed Bin Salman said in an interview leading up to the Doha summit. “If we don’t freeze, then we will sell at any opportunity we get.”[1]
The crown prince later said that Saudi Arabia, the de facto head of OPEC and world’s second largest oil producer, could raise crude output by more than a million barrels per day immediately, followed by millions more.
“We can produce 20 million barrels of oil per day if we invested in production capacity,” Prince Mohammed said.[2]
Clearly, the prince’s message was intended for Iran, a nation that wasn’t even present at the Doha summit on Sunday. The Iranians have made it clear they have no intention of freezing output until they reclaim market share following the lifting of US-led sanctions against the country. This essentially means raising output to 4 million barrels per day through March 2017, which amounts to an increase of about 800,000 a day from last month’s levels.
Saudi Arabia’s hardline approach against Iran reflects a much bigger geopolitical struggle between the two regional rivals, which are divided by ideology as well as politics. Both countries back opposing sides in Syria, with Saudi Arabia arming rebels, including hardline Islamist factions,[3] and Iran backing President Bashar al-Assad. The conflict has raged on for over five years, costing the lives of up to 470,000 people.[4]
To the surprise of many, oil prices have rebounded sharply in the days following the Doha summit. Prices had plunged by 7% early Monday before staging a large recovery over the next two days on news that Kuwait’s state-run oil company was producing well below capacity due to a worker strike. Kuwait’s output plunged 60% to 1.1 million barrels per day initially before recovering to 1.5 million a few days later. OPEC’s fourth largest oil producer pumped an average of 2.8 million barrels per day in March, according to data compiled by the International Energy Agency (IEA).[5]
While it’s unclear whether Saudi Arabia intends to produce more crude in the near-term, the kingdom is maintaining its long-term strategy of rebalancing an oversupplied market by pressuring global markets with lower prices.[6]
[1] Stanley Reed and Andrew Kramer (April 17, 2016). “In Doha, Major Oil Exporters Fail to Agree on Production Freeze.” New York Times.
[2] Daily Hornet (April 17, 2016). “Saudi Arabia: ‘We Can Produce 20 Million Barrels of Oil Per Day’”
[3] Kim Sengupta (May 12, 2015). ‘Turkey and Saudi Arabia alarm the West by backing Islamist extremists the Americans had bombed in Syria.” The Independent.
[4] Anne Barnard (February 11, 2016). “Death Toll From War in Syria Now 470,000, Group Finds.” The New York Times.
[5] Anthony DiPaola and Nour Al Ali (April 19, 2016). “Kuwait oil output rises to 1.5 million barrels a day amid strike.” Chicago Tribune.
[6] Grant Smith (April 18, 2016). “Saudi’s Other Warning Makes Oil Traders Sweat After Doha Failure.” Bloomberg.
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