Saudis said to plan cautious response to U.S. action on Iran oil

Saudi Energy Minister Khalid Al-Falih. Image: World Economic Forum

Saudi Arabia is ready to boost oil production in response to tighter U.S. sanctions on Iran, but doesn’t plan any radical moves.

The world’s largest crude exporter wants to see a decline in Iranian shipments before boosting output significantly, according to people familiar with policy deliberations in Riyadh.

The kingdom’s caution stems from experience. When Trump first said last year he planned to drive Iranian exports to zero, Saudi Arabia took the threat literally responded to pressure from the White House by boosting production to an all-time high above 11 million barrels a day.

At the last minute, Trump backtracked, granting waivers that let countries buy Iranian oil without facing U.S. sanctions, and oil prices plunged.

This time around, Saudi Energy Minister Khalid Al-Falih signaled a wait-and-see approach in a carefully worded statement released on Monday.

"In the next few weeks, the kingdom will be consulting closely with other producing countries and key oil consuming nations to ensure a well-balanced and stable oil market," Al-Falih said.

The vague pledge had been agreed in advance of the U.S. announcement -- oil officials had traveled to Washington in the past two weeks for face-to-face discussions with American diplomats, according to a person briefed on the meetings.

"Saudi Arabia, the U.A.E. and the U.S. are all working together to offset the loss," Brian Hook, the U.S. special representative for Iran, told Bloomberg TV in an interview.

Saudi oil production production is already set to start a gradual rise in May and June as the refinery maintenance season ends, prompting higher demand from clients in Asia.

After cutting output in March and April to about 9.8 million barrels a day, the kingdom was planning to boost it above 10 million barrels a day over the next two months. But Saudi Arabia doesn’t yet plan production above its assigned OPEC quota of 10.311 million barrels a day, the same people said, asking not to be named because the information is private.

"The trauma of having surged output in the third quarter of 2018 to protect the world from the effects of U.S. sanctions on Iran only to have the rug pulled out from under them lingers," Amrita Sen, chief oil analyst at Energy Aspects Ltd., said in a note to clients. "Given the experience last autumn, any increases are likely to be more measured and follow a slower ramp up profile."

Iran is exporting currently about 1.4 million barrels a day to just five nations -- China, India, Japan, South Korea and Turkey -- compared with 2.9 million barrels a day before the first round of sanctions was imposed last year. Some extra oil may be flowing elsewhere secretly as tankers are switching off the transponders that broadcast their position when they approach Iranian water.

Saudi Arabia’s caution is also informed by a genuine belief the oil market isn’t particularly tight. Only a few days ago, officials were canvasing others within OPEC to extend the current round of production cuts into second half of the year when they expire in June, according to an official who held talks with the Saudis.

Riyadh also knows from its experience last year that U.S. shale can react within weeks to higher oil prices, boosting production significantly.

The oil price reaction will give the Saudis comfort. Although Brent crude surged to a six-month high above $74 a barrel on Monday, and extended its gains on Tuesday, the rally was modest considering the amount of crude that Trump is seeking to take out of the market. Monday’s increase in Brent prices of 2.88 percent wasn’t even among the top five largest daily percentage surges over the last year.

Unity with Russia

For the Saudis, keeping the unity with Russia, which for the last three years has worked closely with Riyadh as part of the so-called OPEC+ group, is also important. Last year, they had already ramped up production from 10.4 million barrels a day in July before Trump made a personal plea to Saudi Crown Prince Mohammed bin Salman for more oil. Output was pushed to a record of nearly 11.1 million barrels a day by November without consulting with Moscow.

Rather than act unilaterally this time, the kingdom appears to be waiting for discussions with its OPEC+ allies before moving beyond its quota of 10.3 million barrels a day this time around. The first opportunity for the talks will come on May 19, when a small group of OPEC+ countries will gather in Jeddah, Saudi Arabia, to assess the market. The next full OPEC meeting is scheduled for June 25-26 in Vienna.

"Saudi Arabia is now in a difficult position of having an alliance with Russia to reduce oil supplies and having an alliance with the U.S. to increase supplies," said Oliver Jakob, head of Swiss-based consultant PetroMatrix GmbH. "You can’t have it both ways for too long."

© 2019 Bloomberg L.P