Market Fundamentals Remain The Key Driver of Saudi Oil Policy

Written by Argus Media, a member of the Aspect Partner Program and an independent media organization that produces price assessments and analysis of international energy and commodity markets.

Saudi Arabia’s aggressive financial investments abroad, the role of Saudi Aramco in expediting these ventures, and the creation of yet another new high-level governing body have raised concerns that a major shift in the kingdom’s oil policy is under way. A raft of speculative reports that political and economic machinations in Riyadh are increasingly dictating Saudi Arabia’s oil production strategies are compounding the narrative.

Certainly, Saudi Aramco is playing a much more pivotal role in the country’s economic and financial strategic plans than in the past. Indeed, Saudi Aramco has become a central pillar of the kingdom’s ambitious economic reform plans ever since Vision 2030 was unveiled in 2016. Even the most broad-minded visionaries may be surprised by the far-reaching role that the state-owned oil company is now playing in the government’s expansive forays into financial ventures abroad. Of particular concern are the unorthodox and risky investments by the country’s sovereign wealth fund — the Public Investment Fund (PIF), which is overseen by the Higher Economic Development Council.

With the complex initial public offering for Aramco off the table for now, a government-hatched plan to secure other sources of funding for the PIF by essentially instructing Aramco to buy a controlling stake in petrochemicals giant Sabic has raised the spectre of political interference. The PIF’s new investment direction using Aramco as a war chest is alarming for a number of reasons, but it does not signal a fundamental change in the kingdom’s long-standing oil policy.

Erroneous reports in recent weeks that political machinations are increasingly dictating Saudi Arabia’s oil production strategies are fuelling claims of a major shift in the kingdom’s oil market policy, but this is unfounded and created unwarranted market uncertainty. Ironically, claims that there was a wide discrepancy in production data for July were later disproved when an industry consensus coalesced around 10.3mn b/d, in line with Argus estimates.

Initial high estimates may in part have been based on statements by some Saudi officials in June that they expected to raise July output to 10.8mn b/d to meet higher demand, as well as on a series of tweets by US president Donald Trump prodding OPEC to raise production to pressure prices. Perhaps if some reporting agencies had taken time to delve deeper into Saudi export data and analyse market fundamentals that signaled a lack of demand for additional crude, especially the lighter quality grades on offer by Aramco, they would have realized that there was a month-on-month drop in supplies, not the mooted increase.

Market data indicated a fall in Saudi output for July, but some market analysts and reporters appear to have jumped to the conclusion that political forces were now dictating Saudi oil policy. As one of the world’s largest oil producers, Saudi production figures are a closely watched indicator of oil price direction. The reports were not only misleading but border on irresponsible. Saudi Aramco’s cherished reputation for independence from political interference may yet be tarnished by some of the crown prince’s risky international investments, but the country’s oil policy remains intact. Saudi oil policy has always been anchored by commercial oil market decisions and this pivotal foundation has not changed.

This report is taken from Argus Global Markets, a weekly publication that gives vital insight into the latest international oil market developments. For more information, please visit argusmedia.com. Argus reports and news are available in AspectDSC, the leading market data solution for oil traders around the globe.