Riyadh faces OPEC dilemma

The oil market has been very publicly bludgeoned in the last two months, with prices down from $86 per barrel on October 3 to $58 on November 23, a 32 percent cull. The question being asked in the run-up to a key OPEC meeting is which end of the producer/consumer spectrum will the cartel, a body dominated by US ally Saudi Arabia, fall?

"Crude prices are suffering strong downside pressures due to abundant global supply and weakening demand," Daniela Corsini of Intesa Sanpaolo in Milan told DW. "In our baseline scenario we expect that OPEC and non-OPEC allies will cut by about 1.3-1.8 million barrels per day (mbd)." She saw a cut as the most likely outcome of the OPEC+ (including non-member Russia) meeting in Vienna on December 6.

Oil prices are increasingly being determined by the Troika of Saudi Arabia, Russia and the US, the world's three largest producers accounting for 40 percent of global production of crude oil and condensates.

But many analysts have been circumspect, adopting a wait-and-see approach with oil market forecasts riddled by political uncertainty over the US-China trade conflict, indications of increased global crude production, which analysts call "emerging supply overhang" — i.e. too much being pumped out of the ground  and financial market weakness.

Production cuts expected

Trump has put pressure on Saudi Arabia not to cut production. Since the stock markets nosedived in recent months, Trump has sought a new symbol of the success of his economic policy of tax cuts, and low oil prices appear to be it. Whether he realizes that low prices may be good for one of his constituencies, namely blue-collar workers, but also undermine another, namely big energy concerns, is moot.

Saudi Arabia raised oil production to a record high in November, but crude exporters are widely expected to agree to cut output at the OPEC meeting.

Riyadh has in fact said it wants a cut in output by 1-1.4 million bdp and may reduce its own supply by 500,000 bpd. This could bump the price up by at least $10, one analyst said, still way short of the country's $90 to meet its budgetary requirements.

The Khashoggi effect

But Saudi Arabia also faces international pressure after the murder of journalist Jamal Khashoggi in Istanbul on October 2, the day before Brent crude oil hit its $86.7 peak.

"These developments have left the kingdom weak in the eyes of the world and dependent on support from Trump," Hansen said. "This is a dependency which has come at a price, namely the promise to pump."

Saudi Arabia, he says, was left blindsided by the US decision to allow eight countries to continue to buy oil from Iran after the reintroduction of sanctions. "This decision combined with the increase in production left the market nowhere to go but down and fast," Hansen said.

Trump's Iran waivers confuse market

Trump has withdrawn the US from the Iran nuclear deal and reimposed sanctions on Tehran last month, but with the caveat that the US grant waivers to eight countries allowing them to keep buying oil from Iran. These included China, India, and South Korea.

Trump seems to have encouraged Saudi Arabia's recent spike in production to fill the gap once Iranian supply stopped. But now Iranian oil isn't off the market due to the waivers, there are fears of a supply overhang.

Putin's role key

Much depends on how the Russians decide to play their hand. Most overseers expect Saudi Arabia and the GCC to decide to cut production. "But without Russia, the market impact is likely to be limited," Sara Vakhshouri, president of SVB Energy International, told DW.

"Russia is not very interested in losing market share and reducing its oil production, especially that the market is not convinced that the eight waivers will significantly add to Iran's exports," she went on.

Putin said recently that an oil price of around $70 "suits us perfectly." Russia's budget and economic forecasts are based on an average oil price of $40 for 2018, so there is some wiggle room.

Hansen said he believed crude oil would move back toward $70 by the end of the year.

Political clout

"In the end, it is a clear political choice: Saudi Arabia needs foreign investments to diversify its economy and finance its 2030 goals, and a stable crude price is the necessary condition to attract capital," Corsini concluded.

"Moreover, Saudi Arabia needs the US support to strengthen its regional hegemony against Iran and could easily accept losses of market share in favor of the US in exchange for this cooperation."