Confirmed: Saudi Arabia 'Throws In The Towel' On Oil Price War

| About: The United (USO)

Summary

OPEC decision announced to limit production to 32.5 million barrels per day.

Effectively, it is a unilateral cut by Saudi Arabia.

Confirms Saudi Arabia has "thrown in the towel.".

Click to enlarge

Photo Credit: REUTERS/Ramzi Boudina.

OPEC agreed to limit its production to 32.5 million barrels per day (mmbd), OPEC sources told Reuters. The individual quotas will be announced at its regular meeting on November 30th.

Implications of a 32.5 Million Barrel OPEC Quota

According to my analysis, which is based on OPEC's numbers as published in its September Monthly Oil Market report, such a supply limitation would enable world oil supplies to balance with demand for 2017 as a whole.

Specifically, as shown in the table below, the "call" on OPEC oil in 2017 equates to 32.5 mmbd. It seems clear to me that this is how OPEC came to this number.

MMBD

"Call"

Production

Balance

Stock Change (MMB)

1Q16

30.05

32.50

2.45

221

2Q16

31.66

32.76

1.10

99

3Q16

32.70

33.24

0.54

49

4Q16

32.25

32.17

-0.08

-7

1Q17

31.30

32.50

1.20

108

2Q17

31.95

32.50

0.55

50

3Q17

33.73

32.50

-1.23

-111

4Q17

32.89

32.50

-0.39

-35

2016

361

2017

12

Click to enlarge

Saudi Energy Minister Khalid al-Falih said:

Iran, Nigeria and Libya would be allowed to produce "at maximum levels that make sense as part of any output limits which could be set as early as the next OPEC meeting in November."

Iranian Oil Minister Bijan Zanganeh maintained Iran's position that it would agree to curtail its production 4 million barrels per day. Therefore, the only logical interpretation is that Saudi Arabia alone - perhaps together with token cuts by Gulf producers - would shoulder the cut. This amounts to the unilateral cut which I suggested would make sense for the Kingdom.

I constructed two scenarios below to assess how much of a cut might be required of Saudi Arabia. In Scenario One, I assumed that Iran produces 4.0 mmbd, Nigeria produces 2.0 mmbd, and Libya produces 0.480 mmbd, the latest figure reported by Libya after opening its ports. Implied Saudi output would drop to 9.2 mmbd.

In Scenario Two, I assume Nigeria increases production to 2.25 mmbd and Libya reaches 950,000 b/d, which it claims it can attain by the end of this year. The implied Saudi output would have to be cut to 8.5 mmbd, a 2 mmbd cut.

Scenario

Scenario

Aug-16

One

Two

Crude Oil

Algeria ...........

1.05

1.05

1.05

Angola ...........

1.82

1.82

1.82

Ecuador .........

0.55

0.55

0.55

Gabon ............

0.21

0.21

0.21

Indonesia ........

0.73

0.73

0.73

Iran ................

3.66

4.00

4.00

Iraq ................

4.43

4.43

4.43

Kuwait ............

2.52

2.52

2.52

Libya ..............

0.25

0.48

0.95

Nigeria ...........

1.50

2.00

2.25

Qatar .............

0.68

0.68

0.68

Saudi Arabia .

10.45

9.20

8.48

UAE ..............

2.72

2.72

2.72

Venezuela ......

2.11

2.11

2.11

OPEC Total .

32.68

32.50

32.50

Click to enlarge

I had written that Saudi Arabia could rebalance the market by announcing and implementing a two million barrel per day production cut which it is effectively saying it will do if necessary.

Conclusions

Last July 2015, I had predicted that Saudi Arabia would "throw in the towel" on its oil price war strategy "if oil prices remain below $50 per barrel for an extended period of time."

If they do change course, and I believe they will, there will be no admission of defeat. It may be portrayed as a plea by other OPEC members to the Saudis, and a face-saving triumph of solidarity. The Saudi minister may also be granted his wish - previously tendered - to retire, thereby setting the stage for a new Saudi oil minister and policy, which may be to preserve revenues - at past levels - rather than market share."

In August 2016, I had written that "Saudi Arabia Throws In The Towel On Oil Price War," to which there were comments, such as, "That does not sound like 'Throwing in the Towel' to me." Last week, I cited more evidence of the about-face in their strategy.

The OPEC decision today is effectively a unilateral cut by Saudi Arabia, reversing its previous strategy announced in November 2014.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.