Saudi Arabia’s deputy crown prince sent his energy minister to an OPEC meeting last month with a difficult mission: Make a deal with rival Iran but don’t compromise the kingdom’s ability to fight for oil-market share, people familiar with the matter said.
The directive was a departure for Deputy Crown Prince Mohammed bin Salman, the powerful 31-year-old son of King Salman who is prosecuting Saudi Arabia’s war in Yemen against Iran-backed rebels. Prince Mohammed scuttled previous attempts at oil-production
deals with the Organization of the Petroleum Exporting Countries this
year as Saudi Arabia worried about Iran’s rising output following the
end of Western sanctions.
The agreement struck in Algiers last
week would slash 1% to 2% of the 14-nation cartel’s 33.2 million barrels
a day of production, the first time OPEC has agreed to limit output in
eight years. Oil prices have surged, with U.S. crude prices breaking $50
a barrel on Thursday for the first time since late June, up over 13%
since the Sept. 28 OPEC deal.
Oil prices have also been boosted in recent days by significant drawdowns of stored oil in the U.S.
The U.S. Energy Information Administration on Wednesday said U.S.
crude inventories declined by 3 million barrels in the week ended Sept.
30, falling for the fifth straight week. It was another sign that demand
is catching up with the oversupply of crude that caused prices to
collapse in 2014.
But the OPEC deal took oil-market observers by
surprise after two years of indecision from the cartel. Analysts said it
raised the question of whether Saudi Arabia was reversing its policy of
fighting for market share in the era of low crude prices.
According
to the people familiar with the matter, Prince Mohammed didn’t
authorize a sea change in Saudi Arabia’s market-share strategy. While
Saudi Arabia will take on the bulk of OPEC’s proposed cuts, slashing up
to 400,000 barrels a day by the end of the year, the kingdom was
planning to make those cuts anyway, the people said.
Saudi energy minister Khalid al-Falih
could only offer to bring the kingdom down from record highs this
summer to more sustainable levels that were pumped in the spring, the
people said.
Meanwhile, Iran agreed to a still-undefined cap on
its production for the first time. Other OPEC members agreed to cut as
well, in amounts still to be determined.
Attempts to reach Prince Mohammed were unsuccessful. Mr. Falih didn’t respond to requests for comment.
A
Saudi energy ministry official denied that Mr. Falih has taken orders
from the deputy crown prince but said, “Mr. Falih is always in constant
consultation on oil policies with the king, the crown prince and the
deputy crown prince.”
The OPEC deal “is not really a change in
the Saudi oil strategy or a big compromise on the Saudis’ part,” said a
Saudi oil-industry official. “The kingdom would still be able to meet
all of its customers’ demand comfortably at these levels and without
losing market share.”
On Wednesday, for instance, Saudi Arabia
cut the prices it charges for oil in key markets in Asia and Europe,
intensifying its market-share rivalry with Iran, Iraq, Angola and other
OPEC members. Saudi price cuts are generally matched or beaten by those
countries to stay competitive.
Oil traders are now watching
whether non-OPEC members such as Russia join the production cuts.
Russia, which produces more crude oil than any other country, is meeting
with Saudi Arabia and other OPEC members next week at a conference in
Istanbul to discuss potential cuts.
Prince Mohammed is second in
line to the throne in Saudi Arabia and has been given an expansive
policy portfolio, including economics and defense. He has been entrusted
by his father to oversee several jarring changes to reform the economy
and reduce its reliance on oil. The prince also heads Saudi Arabian Oil
Co.’s Supreme Council, the top decision-making body for the world’s
largest oil company, and has been heavily involved in oil policy
decisions in the past year.
The prince stopped Saudi Arabia from making a deal on oil production with Russia and other OPEC members in Qatar in April.
People
with knowledge of Saudi strategy-making have said the kingdom was
pushed into action after more than two years of slumping oil prices
began imposing economic pain on ordinary Saudi citizens who had grown
accustomed to a subsidized lifestyle. Saudi Arabia also needed money to
continue pressing its war on its southern border with Yemen.
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Prince Mohammed met Russian President Vladimir Putin
at the G-20 summit in China in early September. After the meeting, the
Saudi and Russian energy ministers announced a pact to stabilize the
market.
Mr. Falih wanted to make OPEC relevant again and feared
the cartel could collapse without at least a show of action this year,
people familiar with the matter said. He met with Prince Mohammed to
consult about the meeting in Algiers, the people said.
“Falih was
given the green light to make this happen by Mohammed bin Salman,” said
a person familiar with the matter. They “really wanted a deal or at
least the framework of a deal.”
The deal struck in Algiers could
still fall apart. OPEC has a long history of agreeing to production
cuts, only to have the pact collapse when countries change their minds.
Iran is trying to increase production, not reduce it, and so are OPEC
members Nigeria and Libya, where security problems have cut off output.
The
rise in oil prices could help American shale producers, who could in
turn help sink oil prices with new output. A U.S.-based oil boom caused
the oil-price crash, and the flood of new crude helped shape the
so-called Saudi market-share strategy. Saudi output cuts would only help
American producers, Saudi officials have said, so the kingdom would
pump up its own output and compete at low prices.
Robin Mills,
chief executive at Qamar Energy, a Dubai consulting firm, said Saudi
Arabia appeared to be just tweaking its strategy, aiming it less at the
U.S. and more at OPEC competitors such as Iran.
“I would see it as a definite move away from the market-share strategy in terms of OPEC vs non-OPEC,” Mr. Mills
said. “But within OPEC, it’s a continuation of the market-share
strategy, at least aiming to prevent Iran from taking much more market
share from Saudi Arabia.”
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