After the most recent OPEC meeting and the subsequent sell-off, many are complaining OPEC missed an opportunity in not agreeing deeper cuts. In the popular investing imagination, Ali al-Naimi, former Saudi oil minister, was the architect of a cunning but fatally flawed “pump-at-will” strategy designed to crush the plucky, innovative American underdog in a price “war on shale“. When he was replaced in 2016 by Khalid al-Falih, this supposedly marked a distinct shift in policy towards rapprochement with Saudi Arabia’s OPEC allies and the organisation of the production cut deal.
In fact, Saudi oil policy has been much more continuous than many people realise. Since 2014, Saudi Arabia has sought production deals at every turn. As prices began to slide, al-Naimi met potential production cut allies , including Venezuela and Mexico, in Vienna in the run up to the November OPEC meeting. Top of the list, however, was Russia, a country with a similar level of production as Saudi, and a similar level of government control over its industry. It is also a country with a history of reneging on promises with OPEC.
Al-Naimi met with Igor Sechin, head of Rosneft, and Alexander Novak, the energy minister. No deal could be found between these two oil behemoths, so Saudi Arabia – the country that would shoulder the biggest burden – vetoed calls for a cut in the subsequent OPEC meeting. Al-Naimi subsequently recalled the period in the 1980s when the Kingdom attempted to support prices alone, the effect of which was merely to allow others, including its OPEC allies, to take its market share as prices continued to slide.
As with his shuttle diplomacy in 2014, Al-Naimi’s subsequent actions support a picture of a man keen on getting a deal to support prices if one could be found. While OPEC could not agree a production ceiling throughout 2015, along with Qatar, Russia and Venezuela, al-Naimi signed a production freeze agreement in February 2016 which would come into effect if Iran could be convinced to join it. This proposal formed the basis for an April meeting in Doha of eighteen oil nations to, it was assumed, simply sign the deal that had been hammered out over the preceding months. The terms of it are familiar: a freeze at January 2016 levels, amounting to 32.5 million b/d of OPEC production – the same levels as the eventual production cut deal.
But the deal was scotched by a last minute intervention from Mohammed bin Salman, the new Deputy Crown Prince in charge of energy, over regional rival Iran’s insistence it should be exempt to allow it to recover market share lost under sanctions. Called together on the assumption the deal was a formality, other nations were reportedly upset that bin Salman backed out at the last possible moment.
Shortly thereafter, the veteran oil minister, who was appointed by the previous King Abdullah, was retired in favour of al-Falih. His successor is seen as more loyal to bin Salman, though no less capable. The OPEC deal that was eventually agreed came when Iran had, indeed, largely recovered its former production levels.
What should we take from this history? That, far from being a devilishly cunning anti-capitalist Arab plot to confound the stout blue-collar American worker, it was a rational strategy absent an agreement with Russia, aimed at protecting Saudi national interests. Deals were sought – where they were not practical they were not agreed.
As a result, this should inform our view of the possibility of deepening cuts. The cuts are the result of what signatories are prepared to agree to, and good compliance rates for the agreed cuts have only been achieved through Saudi Arabia overcompensating for less committed states. Politics is the art of the possible, not the Make-a-Wish Foundation – there is often a disconnect between what markets demand and what politics can supply.