How Much Oil Production Will The Saudis Cut?
Donald Trump continues to take credit for lowering oil prices.
✔@realDonaldTrump
So great that oil prices are falling (thank you President T). Add that, which is like a big Tax Cut, to our other good Economic news. Inflation down (are you listening Fed)!
Trump’s tweetstorm complicates the OPEC+ meeting in Vienna next week. Trump is very much leaning on Saudi Arabia, pressuring them not to cut output. And he has gone out of his way to protect the Saudis even though the CIA has concluded that crown prince Mohammed bin Salman likely ordered the murder of journalist Jamal Khashoggi. He clearly expects the Saudis to return the favor by not cutting production.
This puts Riyadh in a bind. Saudi Arabia needs to patch up its relationship with the West, but it also can ill-afford oil prices at current levels. Saudi Arabia needs Brent to trade north of $80 per barrel for its budget to breakeven. Massive budget deficits during the 2014-2016 downturn help explain Riyadh’s about-face in late 2016 – they had tried to force high-cost drillers out of the market by crashing oil prices, but ultimately caved and engineered an OPEC+ production cut to push prices back up.
Little has changed since then. Saudi Arabia’s spending commitments are still large, and that is before we even take into account MbS’ overly-hyped economic reform proposals. Saudi Aramco is also trying to figure out how to transform itself for the long haul. There was the much-ballyhooed Aramco IPO that has since been shelved. There were the plans for Aramco to issue one of the largest corporate bond offerings ever in order to finance a major stake in Sabic, the state-owned Saudi chemical firm. That initiative was also recently abandoned.
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