Saudi Arabia has approached other members of OPEC to discuss possible steps they can take to arrest a slide in oil prices that have brought them to the lowest in seven months.
Bloomberg quotes an unnamed Saudi official as saying Riyadh was not willing to tolerate this price trend, and was open to all options. The source, however, stopped short of detailing any of these options.
The pinch is certainly painful: Saudi Arabia cut more oil production than it had agreed to under the OPEC+ agreement to stabilize prices, and prices are falling despite this. The Kingdom also recently said it would cut its selling prices for Asian clients, which could not have been good for revenue streams, either.
There is precious little Saudi Arabia—or OPEC, for that matter—could actually do. They could cut deeper, with the expected consequences, which would likely be a temporary improvement in prices and then another slide as trade war-related worry reasserts itself as the leading cause for oil demand pessimism. The fact that the latest drop in oil prices was the result of a spike in worry about a currency war is telling enough.
Alternatively, they could open the taps because there is the United States and its shale revolution that has turned it into one of the world’s top ten oil exporters. This revolution was also the main driver of lower prices that forced OPEC to act in the first place. Shale oil is relatively expensive to produce and the great majority of the companies extracting it are burning cash already, so a drown-them-in-oil strategy could send a lot of these under.
Unfortunately, this strategy won’t be any gentler on the OPEC members applying it. Most Gulf producers are still struggling with budget deficits and their belated efforts to diversify their economies. Saudi Arabia alone has committed hundreds of billions of dollars to such diversification projects, but their success hinges on continued oil exports at a certain price level.
By Irina Slav for Oilprice.com
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