The oil market is experiencing extremely turbulent months as a result of the conflicting forces that are battering its price from one side to the other. The strength of non-OPEC supply (USA, Canada, Guyana…) recently led to crude oil prices Brenta reference in Europe, to lose 70 dollars per barrel. However, days later, crude oil flirted with $80, a jump of ten dollars as a result of an attack by Iran on Israel with ballistic missiles and the fear of a frontal response from Israel. However, this week, crude oil is trading again at $73. This roller coaster, which now seems to have gone downhill again, also has two extra incentives that can turn everything upside down.: Saudi Arabia has the capacity to generate a flood of oil (its idle capacity) that sinks crude oil prices in a market in which demand is weakening. This combination of factors would be unprecedented, generating a great impact that would take the price of crude oil to even $30 per barrel, less than half the current price, according to Capital Economics experts.
Saudi Arabia is currently producing around 9 million barrels of oil every day, far from the 13.2 million pumped by the US, the world’s largest producer of crude oil. However, Riyadh has an ace up its sleeve: an idle capacity (its production potential) that is estimated between 3 and 3.5 million extra barrels, which the kingdom can put on the market almost overnight if it decides. put all your oil machinery to work. Why hasn’t he done it? Riyadh is leading a strategy of crude production cuts together with the Organization of the Petroleum Exporting Countries (OPEC) that aims to keep the price of crude oil at relatively high levels at the cost of losing market share. Why would Riyadh change its mind? It seems that Saudi Arabia has tired of oil freeloaders (countries that skip the agreement and produce more than promised) and because the strategy of cuts is exhausted.
However, Capital Economics has published a report in which they explain that “now that Saudi Arabia has the means, the motive and the opportunity to change its oil policy… we have published a series of updates on Saudi oil policy Saudi Arabia, in which it has been concluded that the possibility of Saudi Arabia turning on the oil tap has increased, as it did in 1985 and 2015. To put that in context, we estimate there’s a 30% chance it will do so within the next year or so.“say these experts.
This is a feeling that reigns among all types of analysts, although they do not dare to release a figure. An example is the BCA Research experts who comment that oil is doomed to weaken in the next six months. The fundamental reason is that “even with good economic news, Chinese stimulus announcements or problems in the Middle East” the reality is that “there is enough capacity available to offset any supply problems, particularly the Iranian one.” The reason given by experts is that “concerns about market share should prevent Saudi Arabia from reducing production” and even give it incentives to accelerate the decline in cuts already imposed.
First, the ultimate impact on oil prices would depend on how Saudi Arabia meticulously implements that production increase. “The options available to change oil policy are not binary and could range from simply increasing production to its maximum capacity level progressively, to a ‘nothing to lose’ situation that involves increasing supply as quickly as possible. Clearly, the latter would be much more damaging to the oil market,” they point out from Capital Economics.
Second, the impact of this change in tactics by Saudi Arabia on the oil market would depend on how other oil producers respond. Historical comparisons show that the rest of OPEC tends to follow suit. This means that if Saudi Arabia opens the taps, the rest of the cartel countries will too. “Clearly, the more any policy change leans toward a ‘nothing to lose’ situation, the more likely that is to happen. The EIA estimates that, in addition to the 3.5 million barrels per day of reserve that Saudi Arabia has, the remaining OPEC producers have an additional 1 million bpd.
These figures could be even higher. The data managed by the agency Bloombergaccording to analyst consensus forecasts, point to a much higher surplus capacity on the part of Saudi Arabia’s colleagues in the cartel: together, they could inject close to 3 million barrels a day into the market if they manage to press the accelerator and produce to the maximum of its capacity. Of course, without Iran, the total figure would be 2.5 million barrels, which, combined with Saudi’s excess capacity, reaches 6 million barrels per day. According to this data collected by the agency, OPEC’s production capacity at this time is 33.49 million barrels per dayand they are only producing 26.6 million.
Third and finally, a change in Saudi oil policy this time “would differ from previous episodes because it would occur in a context of structural weakening of demand growth. It is true that any downward pressure on oil prices could incentivize additional demand, but that impact would probably be small in relative terms and, fundamentally, demand would not increase enough to completely absorb the tide of oil,” Capital Economics warns.
The range of possible scenarios is wide at this time. The war can escalate in the Middle East, or gradually moderate, as is the case with the price war of large producers. However, the consensus of analysts now considers a gradual, but slow, decline in oil prices in the coming years as the central scenario. From around 74 dollars at which the European barrel is now trading, the experts collected Bloomberg They aim, on average, at prices of $71 next yearand 70 in 2026. By 2027 the Brent will have fallen below $70, if analysts’ estimates are met.
Riyadh has telegraphed the opening of the oil tap
In any case, the idea of seeing Saudi Arabia turning on the oil tap and sinking prices to these levels is not simply a theory. From the Kingdom itself they have opened the door wide to this possibility and have even quantified its impact. At the beginning of October, its Energy Minister Abdulaziz bin Salman al-Saud said in a conference with his OPEC counterparts that if they did not collaborate more closely they were willing to produce in droves, causing the European reference price, the Brentfell to $50. “It makes no sense to add more barrels, if there is room in the market, some should keep quiet and respect their commitments to OPEC,” explained the senior official.
Saudi Arabia is paying a high price on two very different fronts. Firstly, the Asian country has committed itself to an ambitious and expensive mega-investment plan in all types of sectors to make its economy increasingly dependent on oil. The ‘Vision 2030’ ranges from large mining projects, futuristic cities in the desert, renewables and soccer stars like Cristiano Ronaldo or Karim Benzema. This has led, despite its enormous oil revenues, to have a deficit perspective of 3% for 2024 according to its own Ministry of Finance when, a priori, this was going to be a sustainable plan in its budgets and compatible with a surplus. .
At the same time that the enormous expense weighs down their numbers, Riyadh is being the biggest defender of the current barrel prices, with a cut of 2 million barrels. However, its idle capacity is much greater, according to bin Salman al-Saud we would be talking about 3 million barrels per day that are not hitting the market (and therefore are not generating income for the Kingdom).
The IMF is clear in its latest report, in which it says that Saudi Arabia’s economy, although it has room given its low debt (less than 30%), needs a barrel at $96 to maintain its expenses. In this context, Arabia wants those OPEC ‘freeloaders’, who are even increasing their crude oil shipments and breaking their promises, to return to order. Specifically we are talking about Russia, Iraq and Kazakhstan. These three countries are all between 115,000 and 200,000 barrels per day below the target. But of all the countries on the Tigris and Euphrates, it is the one that leads the rebellion with an increase of 400,000 barrels per day.
The closure of the Strait of Hormuz is the most dangerous
The figures already analyzed leave a clear conclusion about the current supply and demand situation that oil maintains: if Iran’s crude oil disappeared from the map, the rest of the OPEC producers will be able to cover this gap, and the market would not enter a crisis. situation so tight as to cause prices to skyrocket. However, there is a scenario that, although unlikely, cannot be completely ruled out: the closure of the Strait of Hormuz by Iran, a transit area through which 20% of the world’s oil transits, that is, about 20 million barrels daily.
If this scenario were confirmed, Citi warns that prices would skyrocket above historical highs, although they hope it will be a temporary circumstance, until oil finds alternative routes. After all, it would not be a question of production, but of transportation. The problem is that, if this scenario occurs, the increases can be dizzying: Bank of America, for example, at the end of last year estimated the price that crude oil could reach if this occurred at $250.
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