ID : N-5159 Date : 2019/04/22 - 10:07
(Persia Digest) - According to an opinion piece in the Washington Post, U.S. Secretary of State Mike Pompeo may announce as early as Monday, April 22 that the United States will no longer grant exemptions to countries importing Iranian oil in contravention of the U.S. sanctions. According to the piece, the State Department expects that Saudi Arabia will play a key part in increasing production to offset the loss of Iranian exports and prevent oil prices from rising.
Ellen R Wald writes in Forbes that if this is true, Saudi Arabia would be negating its position of strength within OPEC and decreasing its negotiating power just as the June OPEC meeting approaches. Come June, Saudi Arabia wants to make sure that all of the 14 OPEC member nations plus the 10 participating non-OPEC member nations (most importantly Russia) hold to whatever agreement they make.
If Saudi Arabia comes into the June meeting in Vienna already having made a commitment to the United States that it will produce at a certain level, then it loses any leverage to compel other countries to control production. Even if Saudi Arabia does not have such an agreement with the United States, but the world believes that Saudi Arabia does, the kingdom's negotiating power in Vienna will be hampered.
For the current six month OPEC agreement, Saudi Arabia has actually claimed to be producing below its allocated 10.3 million barrels per day. Therefore, until the end of June, Saudi Arabia can overproduce because OPEC judges compliance based on a 6 month production average. However, the OPEC and non-OPEC countries meeting in Vienna in June care about Saudi Arabia's production for the next 6 months (July through December). If Saudi Arabia looks like it has committed to producing at a certain level in agreement with the United States, Saudi Arabia will lose leverage.
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Some people may wonder if Saudi Arabia or the world has the spare capacity to do this. According to information gleaned from the recent Saudi Aramco bond prospectus, the answer is yes. The Saudi government requires Aramco to be able to ramp up production to 12 million barrels per day within 3 months and hold that level for up to 1 year. This is called MSC and it is possible that the Saudi government may raise the MSC above 12 if it desires.
So, we know Saudi Arabia has the ability to come to an agreement with the U.S. to compensate for lost exports from Iran. However, this would harm Saudi Arabia's position of power within OPEC, at least for the time being. As traders look at this news, they will need to take into consideration whether the strategy, as laid out, makes sense for all the players involved.
Ellen R. Wald, Ph.D. is a historian and consultant on energy and geopolitics.
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