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At first glance, Saudi Arabia could lose $ 3 billion in the first two months of the year by pledging to cut its own oil production so that other oil-producing countries can get away with this revenue-decimating measure. But the cunning Saudis were counting on something else.
It could cost Saudi Arabia $ 3 billion to maintain peace and the willingness of the OPEC + countries to continue cooperating in the oil market. They can lose a lot if they unilaterally decide to reduce their daily oil production by one million barrels in February and March. However, that amount (a quarter of Russia’s loan for Paks expansion) is far from what it seems, so the Saudis are not far behind in their gestures, after all, writes oil strategist Julian Lee in an article in Bloomberg.
The place of the announcement was a meeting in early January between OPEC +, the oil cartel and the largest group of external producers. Russia wanted to ease the extraction restriction by half a million barrels a day starting in February because it is expected to face growing global demand. Most member states doubted this, so they suggested not to change the quotas until now. Saudi Arabia was particularly concerned about openness, believing that if demand did not increase, the oil covered by the market would break the price of black gold to such an extent that they would lose everything they had achieved last year by adjusting to declining demand.
In the end, everyone got what they wanted. Most Member States do not have to change their production until now, Russians and Kazakhs can increase their production in February and March, although they have to postpone for two months what they wanted to do faster, and only Saudi Arabia is reducing its production in a million barrels per day.
Smiled under his mustache
Saudi Arabia’s Oil Minister Abdulaziz Bin Salman (pictured) was apparently in a good mood in the wake of the events, although perhaps he was mainly pleased that he managed to hide the plan that had been devised up to the time of the announcement. Only Russian Deputy Prime Minister Alexander Novak informed them ahead of his gesture, which he hailed as a real New Year’s surprise. The Russians want to avoid a loss of market share at all costs, mainly in favor of the US oil shale miners, and the Saudi move has raised oil prices without their having to do anything.
However, the Oil Minister may have had another reason to rejoice, namely that, on the basis of more precise calculations, it is clear that they do not deviate as much from the matter as it seems at first glance. The production reduction of one million barrels for February and March, 59 days, to $ 51 / barrel of oil, was $ 3 billion, but was reduced by a number of factors.
Open, open and open
The first is the amount saved in extraction costs. The 2019 report from the Saudi Aramco oil company says it will cost the country $ 2.80 to get a barrel out. Taking this inflation at $ 3, $ 177 million could be saved in two months by cutting yields.
The second cost reduction factor is the seasonal decline in domestic consumption. In the first quarter, the country’s oil consumption will decrease by approximately 140,000 barrels per day compared to the last three months of the previous year. As a result, the Saudis recovered daily exports with just 860,000 barrels, or even less if they also bring black gold to the market from oil tanks. It also reduces the apparent loss by hundreds of millions of dollars.
However, the majority will benefit from rising oil prices, a clear consequence of Saudi Arabia’s commitment. As announced, Brent immediately rose to $ 54 a barrel and futures prices also rose almost $ 3. According to the latest available data, Saudi Arabia exported 7.17 barrels of oil and refined products to the world market daily between August and October, generating $ 18.9 billion in 59-day revenue and $ 51 per barrel.
However, if we have $ 54, we get 20 billion. This already cuts the three billion loss by more than a third, of which less than $ 1.3 billion remains after each deduction. And each additional $ 1 price increase in February and March means an additional $ 372 million in savings. In a word, the generous gesture that has put the other OPEC + member states in a pocket is not free, but it really does not go into a pocket.
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