Published November 8, 2022 | 4 min read
Key Points
- With Saudi Arabia set to emerge from this tumultuous year as the G-20's strongest economic performer, the country’s self-confidence was on full display at the 6th annual Future in Investment Forum in Riyadh
- Nonetheless, coming nearly one year after the OPEC+ Declaration of Cooperation was inked, there seemed to be an implicit acknowledgment that oil revenue would underwrite these expansive NEOM Dreams.
- While many in Washington focus on the current price point, there is little discussion about the toll that the 2020 price collapse took on Saudi Arabia’s balance sheet or the fact that this will be the first year since 2013 that the country posts a budget surplus.
- Given the high degree of uncertainty about the sanctions roll out—amidst persistent speculation that Europe could pull the plug at the eleventh hour fearing the economic costs—we think the Kingdom could wait for clear signs of a shortage before deploying its spare capacity.
With Saudi Arabia set to emerge from this tumultuous year as the G-20's strongest economic performer, the country’s self-confidence was on full display at the 6th annual Future in Investment Forum in Riyadh.
The first Davos in the Desert in October 2017 served as a debut party for the Crown Prince Mohammed bin Salman’s audacious Vision 2030 agenda, which promised to radically transform the country by creating millions of new private sector jobs for young Saudis, attracting hundreds of billions in new foreign investment, and rolling back rigid social restrictions that had been in place for decades. Sitting on the stage next to Fox News anchor Maria Bartiromo he emphatically declared, “We will not waste 30 years of our lives dealing with extremist ideas, we will destroy them today. We want to live a normal life.”
Nonetheless, coming nearly one year after the OPEC+ Declaration of Cooperation was inked, there seemed to be an implicit acknowledgment that oil revenue would underwrite these expansive NEOM Dreams.
After attending that first FII, we have had the Crown Prince’s grand ambitions in the back of our heads when we think about Saudi oil strategy. While maintaining market stability was always the declared policy goal, we assumed that delivering the revenue to realize Vision 2030 was the other pillar of the oil minister’s dual mandate (even if this was not always openly discussed).
In the wake of fallout with Washington over the October 5 OPEC decision, the dual mandate directive has seemingly become more explicit.
In our FII interview with the Saudi Minister of Energy on Tuesday, he made it clear that ensuring the success of Vision 2030 is an essential element in the country’s energy strategy. Stressing the importance of domestic economic considerations, “it’s not all about you” seemed to be the message to Washington. While there may have been multiple factors that influenced the headline 2 mb/d collective cut, safeguarding the Vision 2030 funding stream seems to have been a prime policy driver.
While many in Washington focus on the current price point, there is little discussion about the toll that the 2020 price collapse took on Saudi Arabia’s balance sheet or the fact that this will be the first year since 2013 that the country posts a budget surplus.
White House officials continue to insist that they shared with the Saudis market analysis showing that there was no reason to be concerned about a serious sell off (despite prices having fallen by 20% since the beginning of summer). While there has been no public revelation of the content of that analysis, the recently announced plan to repurchase crude for the SPR when prices drop to the low 70s was likely featured in the Biden team pitch.
There may have also been some trepidation about trusting American assurances after the 2018 experience when the White House publicly insisted that there would be no exemptions granted for importers of Iranian oil following the US JCPOA exit in May.
At the June 2018 OPEC meeting Saudi Arabia and OPEC+ answered Washington’s call for an additional 1 mb/d of production that was intended to backfill the assumed sanctions driven supply deficit that would come in the autumn. The producers were then caught off guard in October when the White House did an about face and offered 7 import waivers; a move that triggered a sharp sell off in oil prices. In the wake of that 2018 oversupply experience, we wrote that the Kingdom was pivoting to “A Saudi First Strategy” as it quickly reversed the production increase at the December OPEC meeting. It is worth noting that all of this occurred during a period when Riyadh enjoyed warm relations with Washington and there were multiple touch points between US cabinet officials and Saudi ministers.
By contrast, there is currently no US Ambassador in Riyadh and it has not been US cabinet members leading the bulk of the bilateral discussions with the Saudi leadership but a small number of senior White House and State Department staffers that are highly regarded by President Biden. In such an environment, the risk of a “failure to connect” scenario seems high and misunderstandings about controversial policies such as price caps can quickly metastasize. No US officials attended the FII this week.
Prince Abdulaziz went to great lengths in our FII conversation to highlight the number of occasions when the Kingdom deployed its spare capacity to fill a substantial supply gap, including during the first Gulf War and 2011 unrest in Libya.
The Saudi Energy Minister also pointed to the recent 500 kb/d increase in Saudi exports to Europe as well as the ongoing dialogue with European leaders about potential avenues of additional assistance. Hence, all the signals would seem to indicate that the Kingdom will answer Europe’s call if a major deficit materializes. We currently estimate that an additional 1.5 mb/d barrels will need to be re-routed to Europe following the start of the Russian oil embargo and ban on the provision of western services to move Russian barrels to third countries. The call to backfill Europe could be considerably higher, however, if the price cap plan fails to launch and the services ban is fully implemented.
Given the high degree of uncertainty about the sanctions roll out—amidst persistent speculation that Europe could pull the plug at the eleventh hour fearing the economic costs—we think the Kingdom could wait for clear signs of a shortage before deploying its spare capacity.
With recessionary fears running high we think the Saudi leadership will be wary of a major production pivot until there is more clarity about whether demand destruction or supply shock concerns will be the dominant market preoccupation come year-end. Hence, the December 4 meeting may not necessarily be the venue for a course correction announcement. Whether the White House and Congressional Democrats will have the patience to allow a longer decision lead-time remains to be seen, but there could be different dynamics at play in Washington after November.
Helima Croft authored “Post Card from Riyadh: Dual Mandate,” published on October 28, 2022. For more information on this commentary or to access global commodities research, please contact your RBC representative.
