LONDON — Saudi Arabia has been forced to return to the role of swing producer in the oil market, despite the country’s insistence for three decades it would never play the role again.
Saudi Arabia and its allies in the Gulf Cooperation Council (GCC) account for the majority of production cuts made so far under the OPEC and non-OPEC accords reached in November and December.
By cutting their own output deeply, Saudi Arabia and its allies have masked the low level of compliance from the rest of the organization.
Outside OPEC, Russia has so far delivered only around a third of its promised cut of 300,000 barrels per day (bpd), according to sources.
Russia and other producers have always pledged to phase in cuts, which are meant to be averaged over the first six months of 2017.
Strictly speaking, OPEC and non-OPEC members have not yet failed to honour their promises since they could reduce output more steeply in the remainder of the compliance period.
#Opec Watch: #SaudiArabia FX reserves fell in 2016 (full year) by $78 billion, following a $115.9 billion drop in 2015 #OOTT #OPEC #oil pic.twitter.com/kU767sVTz2
— Javier Blas (@JavierBlas2) February 1, 2017
But Saudi Arabia and its GCC allies have once again supplied most of the upfront cutbacks, reducing their production by enough to create a deficit in the market and draw down excess crude inventories.
Adjusting production to bring about a desired balance between supply and demand, or achieve a particular target price, is the classic role of a swing producer.
Saudi Arabia has been forced back into the role, despite insisting since the mid-1980s it would never
NO ESCAPE
In practice, giving up the role of swing producer has proved impossible, however much the country’s policymakers loathe it.
In March 1999, Saudi Arabia was again taking the lead in cutting production to shore up prices after the Asian financial crisis.
Saudi Arabia and its GCC allies ended up providing most of the production cuts that helped drain excess stocks and push prices higher in 1999 and 2000.
“The only country that reduced production voluntarily, according to the March agreement, is Saudi Arabia, with marginal help from Kuwait and the UAE, while all other oil producing countries were forced to reduce their production because of technical, political, or natural factors,” Anas Alhajji and David Huettner wrote shortly afterwards (“OPEC and other commodity cartels”, 2000).
In the most recent round of cuts, agreed in November and December 2016, Saudi Arabia and the GCC are again shouldering the biggest share, despite spending months insisting this is what they would not do again.
SAUDI BURDEN
The problem is that the role of swing producer is not one that Saudi Arabia’s policymakers have voluntarily accepted, but one which has been thrust upon them.
Saudi Arabia is the only producer that exports enough and has the centralised control to exercise some degree of market power in the oil market.
Other major oil producing countries are net importers, or their production is split among many small independent companies, or is too small to have much influence on global prices.
Saudi Arabia is the only country that has production centralised in one company (Saudi Aramco) and exports enough to have a major influence on global prices (7-8 million bpd).
Saudi Arabia is also a low cost producer which has the operational flexibility to adjust its production up or down by several million barrels per day.
Saudi Arabia is therefore the only country that can to some extent choose a production target or a price target, though importantly not both.
For structural reasons, Saudi Arabia is always the swing producer in the crude oil market, whether it welcomes the role or not.
assume the burden again.
JOHN KEMP
