Saudi Arabia backed out of a deal to freeze crude oil output at the “Doha Initiative” in a sign that the politics of OPEC have changed forever. There seems to be a widened slip from the old energy guard led by Saudi oil minister Ali al-Naimi and the factions led by the new Saudi King Salman. With a formal communique shopped around in Doha to freeze oil output at January levels, the lack of attendance by the Iranian oil minister was enough to make Saudi Arabia back out of any agreement. This was a source of anger to many oil producing countries that had travelled to Doha on the assumption that a deal to freeze production was all but done. But the Saudis pulled the rug from out from under the oil market and backed away as tensions with Iran over oil market share as well as conflicts in Yemen and Syria caused the new guard to tell the old guard to walk away from a deal.
The Doha disaster may now be viewed as the meeting where Saudi Arabia’s role in the OPEC cartel has changed forever. For years it was thought that Saudi Arabia was one of the cooler heads in the OPEC cartel. Under the leadership of Saudi oil minister Ali-Naimi, Saudi Arabia seemed to separate oil business with politics and ran the cartel almost like the global central bank of oil. In fact, years ago I was one of the first ones that called him the “Alan Greenspan” of oil. Yet now, after walking away from this deal, it is clear that Ali Al-Naimi has lost control of the Saudi oil market and now Saudi oil production decisions will be coming from the top. That makes the Saudis a less reliable energy partner and creates more havoc and uncertainty in the global oil markets.
The new man that may be calling the shots is Saudi deputy crown prince Mohammed bin Salman who previously stated that Saudi Aribia absolutely would not freeze oil production unless other producers, including Iran, agree to freeze output. His words became law despite the fact that Russia has been led to believe that a deal to Freeze output was already done. Russian Oil Minister Aleksandr Novak was upset and blamed OPEC states for “undoing two months of negotiations” by presenting demands on the morning of oil production freeze talks. He was upset that they spent 12 hours talking and that the 11 OPEC states and seven outsiders present in the Qatari capital had spent two months drafting an agreement that would cap oil production at January levels to avoid a further price collapse.
Yet it seems that Saudi deputy crown prince Mohammed bin Salman does not care even if he undid the credibility that Saudi Oil Minister Ali al-Naimi had built up for himself and the country of Saudi Arabia over the past decades. We can no longer look to Saudi Arabia as a reliable supplier in times of crises as we have in the past. It seems this new crew of princes are more aggressive, more abrupt, less interested in oil politics and more interested in sending a message to their enemies. While angry, the Russian oil minister says that talks will continue but this is going to be a more uncertain oil market around the globe.
Of course, even without this deal there are still signs the market is getting in balance. The U.S. oil rig count fell by 3 to 351 this week, according to driller Baker Hughes. This is the fourth week in a row the oil rig count fell and put oil rigs at the lowest level since 1999.
Bottom line: Short term, this leaves the crude oil market vulnerable to a drop to the mid-thirties but long term it only enhances our bullish outlook. The Doha disaster will now make it less likely that U.S. oil producers will bring production back online quickly. Companies that were hoping that an accord would keep them in business will give up those hopes and more production destruction will occur. Use market weakness to put on long term bullish positions.